3.2 Business Objectives

Question 1

What is the Profit Maximisation point?

Answer 1

MC = MR

Question 2

Why might a firm Profit Maximise?

Answer 2

• Neo-classical economics assumes that the interests of owners or shareholders are the most important and therefore the goal of firms is to profit maximise in the short run, in order to maximise owners’ returns.
• By short-run profit maximising, firms can also generate funds for investment and to help them survive a slowdown during a recession.

Question 3

What is the Revenue Maximisation point?

Answer 3

MR = 0

Question 4

Why might a firm Revenue Maximise?

Answer 4

• William Baumol suggested managers are most interested in their level of revenue since this is what their salary depended on.
• Even when their salary is not directly connected to sales revenue, they knew that a growth in revenue was always likely to be a positive for the business. It increases their prestige and is used as a justification to shareholders for managerial rewards.
• A fall in revenue would be negative as it would not only reduce their salary but could signal the start of a downward spiral for the company.
• As a result, many firms may aim to revenue maximise as long as they provide some profit for the owners.

Question 5

What is the Sales Maximisation point?

Answer 5

AC = AR

Question 6

Why might a firm Sales Maximise?

Answer 6

• Robin Marris suggested that managers aim to maximise the growth of their company above any other objective. This is because their salary may be linked to the size of the company.
• It is often easier for people to judge the level of growth achieved rather than the level of profit. This will increase the prestige of the business.
• Growth will also increase market share, and may push other firms out of business. It will enable a firm to have more market power and more power over prices.
• This tends to be a short term strategy , and in the long term firms are more likely to profit maximise.

Question 7

What is Profit Satisficing?

Answer 7

• Due to the principal-agent problem, owners and directors will have different goals. Directors will want to maximise their own benefits but will need to make a certain amount of profit in order to keep their jobs, receive benefits and avoid criticism from
  shareholders/the press.
• Therefore, managers are likely to follow the objective of profit satisficing: they will make enough profit to keep owners happy whilst following other objectives and not profit maximising.