3.2 - Business objectives Flashcards
What is the rational business objective for firms?
Profit maximisation
What are reasons for achieving profit maximisation?
> obective = maximise profits
- Provides a financial return to the owners/shareholders.
- Attracts investors and capital.
- Indicates efficient resource allocation and cost control.
> Often a primary goal for profit-driven organisations.
What is the profit maximisation rule
A firm should continue producing additional units until marginal costs = marginal revenue. This point is the profit maximisation level of output
What are the reasons for revenue maximisation?
> objective = To maximise total revenue from the sale of goods or services.
- Can lead to higher long-term profits if accompanied by cost control.
- In the short-term firms may use this strategy to eliminate the competition as the price is lower than when focusing on profit maximisation
- Market Penetration and Expansion: In the early stages of a business or when entering a new market, focusing on revenue can help the company gain market share, build brand recognition, and establish a customer base.
- Costs: Higher output and revenue may enable the business to achieve economies of scale and enhance competitiveness over the long term.
- Attracting Investors and Financing: Businesses with strong revenue growth can be more attractive to investors and lenders
- Business Valuation and Exit Strategies: Businesses aiming to be acquired might focus on revenue growth to enhance their valuation
- Business Survival: Cutting prices to increase revenue and improve cash-flow can be an important way of surviving in an economic downturn.
Why might
sales maximisation occur?
- May occur due to principal agent problem
> Sales managers often receive commission on sales as part of their wages and this incentivises them to maximise sales
> Profit maximisation for shareholders becomes a secondary objective for the sales managers
At what level of output does revenue maximisation occur?
Marginal Revenue = 0
What are reasons for sales maximisation?
> Objective = To maximise the number of units sold, regardless of profit.
- May be used to maintain a dominant market position.
- Can be a strategic choice to deter new entrants.
- In the short-term firms may use this strategy to clear stock during a sale
At what level of output does profit maximisation occur?
MC = MR
What is satisficing ?
To achieve a satisfactory level of profit or performance, rather than maximising it.
What are some reasons for satisficing?
- May prioritise other goals, such as employee satisfaction, social responsibility, or long-term sustainability.
- Reduces the pressure to continually push for higher profits.
At what level of output does sales maximisation occur?
AC = AR
