3.2.1 Business objectives Flashcards
The traditional economic theory is based on the assumption that firms aim to maximise…
Profit
- But in reality - there are other objectives which a firm might consider to be more important.
Profit maximisation
Ensuring profits are as large as possible.
This might only be an objective in the long run.
Where will a firm aiming to maximise profits operate at?
MR = MC
Revenue maximisation
Achieving the highest amount of income.
Firms aiming to maximise revenue will keep increasing output past the point where profit is maximised, as long as adding more output leads to greater value.
Where will a firm aiming to maximise profits operate at?
MR = 0
Sales maximisation
Selling as many units as possible
Where will a firm aiming to maximise sales operate at?
AR = AC
This is the highest level of output the firm can sustain in the long run. If sales are increased further, the firm would be making a loss.
Satisficing
Where a business is making enough profits to keep shareholders happy, or its sufficient for investors to maintain confidence in the management they appoint.
Give an example of why satisficing might happen?
For example, rather than maximising profit, directors might aim to make enough profit to stop shareholders getting too concerned, and paying employees high enough wages that they don’t look for work elsewhere or threaten industrial action. (This is another example of the principal-agent problem).
How might the objectives of a firm change over time?
1) Start with survival and essentially trying to establish themselves in the marketplace.
2) Overcoming barriers to entry
3) Once established, profit then becomes more of a priority.
4) Firms may then turn their attentions to ethical objectives.
Alternative objectives
Some firms might aim for something instead of profit/revenue/sales.
For example, some organisations are not-for-profits. These don’t pay out profits to their shareholders and their main aim is to provide some kind of benefit to the public.
Other firms might focus on producing higher quality products , to gain loyal customers.
Corporate Social Responsibility (CSR)
CSR involves firms operating in a way that brings benefit to society, as well as trying to make supernormal profit. For example:
- A firm may try to protect the environment by using sustainable resources.
- A firm may support local businesses by using suppliers in their region.
- A firm may choose to pay its workers above the standard market rate.
A firm’s CSR policies can help to increase its profits, by encouraging consumers to buy from them.
