3.2 Business objectives

Question 1

What are the four business objectives?

Answer 1

1. Profit maximisation
2. Revenue maximisation
3. Sales maximisation
4. Satisficing

Question 2

What is profit maximisation?

Why is it desirable?

Answer 2

Where the firm either maximises profits or minimises losses - also can be called loss minimisation

Firms want to make the most profit to make the most money

Question 3

What is revenue maximisation?

Why is it desirable?

Answer 3

This is where a firm maximises total revenue

This may be because they have no knowledge of their individual costs, compensation (e.g. bonuses) are tied to revenue, or the principal-agent problem (managers may choose to revenue maximise as they do not account for costs)

Question 4

What is sales maximisation?

Why is it desirable?

Answer 4

When a firm maximises sales of its output while still achieving a normal profit

This may be to maximise business growth and gain market share, as it is the largest the firm can be without making a loss

Question 5

What is satisificing?

Answer 5

This is when a firm aims to make just enough profit to satisfy shareholders, without maximising it

Question 6

What is the formula for profit maximisation and what does it look like on a cost/revenue diagram?

Answer 6

When MC=MR

Question 7

What is the formula for revenue maximisation and what does it look like on a cost/revenue diagram?

Answer 7

When MR=0

Question 8

What is the formula for sales maximisation and what does it look like on a cost/revenue diagram?

Answer 8

When AR=AC