3.2.1 Business Objectives Flashcards
What is profit maximisation
At an output level where marginal cost = marginal revenue (MR=MC)
The change in revenue from producing an extra unit of output = the change in cost from producing an extra unit
What is revenue maximisation
At an output where marginal revenue = zero
What is Sales maximisation
Supplying the largest output possible consistent with earning at least normal profits where AR = AC
What is Satisficing behaviour
Involves the owner of a business (shareholder) setting minimum acceptable levels of achievement of either revenue or operating profits
What would be managerial objectives
- Revenue or sales growth is often preferred instead of profit maximisation
- Achieve satisfactory profit/ return for shareholders
How would information constraints affect a business
This can affect information on MC and revenues
Cost-plus pricing is a common tactic - marking up on average cost can work out elasticity
What would objectives be for a small/start-up business
Small firms are ‘life-style businesses’ for their owners
Start up often target on rapid growth of users rather than profits
How would profit maximisation be represented on a graph
The intersection between MC and MR
What could be the benefits from maximising profits
- Shareholders benefits from higher dividends
- Employees may benefit if their pay is linked to the profitability of the business
- Higher profits may lead to increased capital investment benefiting other businesses
- Profits may be funneled into research and development, increasing efficiency
- provides a safety net in hard times
What are drawbacks from aiming to maximise profits
- Higher prices for consumers - reducing real income
- Higher profits may act as an incentive for new firms to enter the market
- Only focusing on profit could make companies lose sight of the social aspect
- quality could reduce
Loss minimisation is the same as what
Profit maximisation
How would you demonstrate price, output and profit being maximised on a diagram
Intersection between MC = MR = AC
Why would a business want to focus on revenue maximisation
salaries and rewards for managers were closely linked to sales revenue - not profits
It may deter the profitable entry of new firms - rivals in the industry maintain market power
total revenue is maximised at a price and output where…
marginal revenue = zero
How would maximum revenue be presented on a diagram
Where MR=0
And profit maximisation is where MC=MR
When MR is zero, this is what against the AR curve
How does this link to the elasticity
It is the half way point along the AR curve
This is the point where PED is unitary
What is the sales maximising output?
Is where a business maximises output without making a loss
This is where AR = AC
At this output normal profits are made
How would sales maximisation be represented on a diagram
Where Average revenue = Average Costs
What is Satisficing
making the best economic choice from all available alternatives
generally concerned with keeping ‘a range of stakeholder happy’ by the business earning enough profit
this relies on a simpler cost-plus approach and is more concerned with increase sales revenue/market share instead of profit maximisation
At what level does profit satisficing output occur
there is no unique profit satisficing output level
It can occur at any output between profit maximisation and sales maximisation
What type of market would a business aim of market share be particularly predominant
In an Oligopolistic market, which is a market dominated by a handful of large businesses
