3.2 - Business Objectives

Question 1

Profit maximisation

Answer 1

Occurs at the output where supernormal profits are maximised. Occurs where MC=MR, this is a necessary condition but not sufficient. MC must also be rising. When evaluating profit maximisation, consider whether a local coffee shop knows the marginal cost of a cup of coffee.

Question 2

Revenue maximisation

Answer 2

Occurs when a firm wishes to make as much revenue as possible, occurs when MR=0.

Question 3

Sales maximisation

Answer 3

Occurs when a firm attempt to sell as much as it can without making a loss, selling the most it can, subject to the constraint of making normal profit. Occurs where AC=AR.

Question 4

Formulas of different business objectives

Answer 4

• profit: MC=MR
• revenue: MR=0
• sales: AC=AR

Question 5

Allocative efficiency

Answer 5

Producing where p=MC of production. The price of a goos is equal to the cost of the factors of production used to manufacture the last unit.

Question 6

Satisficing

Answer 6

When a firm aims to make a minimum accepted level of profit to keep the stakeholders happy, allowing other motives to be pursued.

Question 7

Predatory pricing

Answer 7

Pricing below costs to drive out other firms. In the SR firm makes a loss but as other firms leave and the prices are raised to higher levels than would have been possible with competition. This is an anti-competitive practise and can lead to fines by the competition authorities.

Question 8

Limit pricing

Answer 8

Pricing at a low level to discourage entry of new prices. A new firm entering the market would be unable to sustain the price. This exploits the economies of scale that an incumbent firm has and is not necessarily illegal in the UK.

Question 9

Other pricing strategies

Answer 9

Other than profit maximising, are cost-plus pricing, making a fixed percentage mark-up on AC. Price discrimination and discount pricing, like buy 1 get 1 free. These often have a good practical rationale and can lead to greater consumer loyalty, thereby inc LR profits.

Question 10

Non-pricing competition

Answer 10

Firms may use non-price competition to inc sales or profit. Includes:

• market strategies like advertising, also giving product to celebs
• increased investment in branding, to inc brand loyalty, such as loyalty cards
• packaging, like free gifts or prizes
• after-care/customer services/warranties
• product development
• quality and innovation
• mergers/acquisition to remove competition

Question 11

Evaluating non-price strategies

Answer 11

Ask whether the firm has enough money to back up any planned strategy, how long it will take to work and whether or not it will work, especially in the face of the actions of rival firms.