3.2.1 Business Objectives

Question 1

What are the 3 main business objectives?

Answer 1

o profit maximisation
o revenue maximisation
o sales maximisation

Question 2

What is profit maximisation in theory?

Answer 2

Neo classical economists assume the interests of owners or shareholders are the most important therefore the general goal to profit max to max 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

Where is profit maxing on a diagram?

Answer 3

MC = MR

Question 4

Why is profit maxing at MC = MR?

Answer 4

If MR > MC, the firm should produce more since selling extra units adds more revenue than it costs to make them (increasing profit).

If MR < MC, the firm should produce less since producing extra units costs more than they earn in revenue (reducing profit).

Basically, If a firm produces less than the MC = MR point, it is missing out on potential profit. If a firm produces more, it is making a loss on the extra units.

SIMPLY -> you are making profits for each unit UNTIL MC = MR where you are making 0 profit. If you go past this point you lose profit, so you should produce at MC = MR because it TELLS YOU WHERE TO STOP / PAST THIS POINT NO MORE PROFIT CAN BE MADE.

Question 5

What is revenue maximisation in theory?

Answer 5

• Higher revenue makes the business look successful, attracting investment and growth opportunities.
• Falling revenue can signal trouble—leading to job cuts, financial struggles, and reduced lending confidence.
• Firms may prioritize revenue growth over profit maximization, as long as they maintain some profit.

Managers often priortise this as it boosts their salary and prestige.

AMAZON

Question 6

Where is Rev max on a diagram?

Answer 6

MR = 0

Question 7

Why is rev max at MR = 0?

Answer 7

• MR (Marginal Revenue) = extra revenue from selling one more unit.
• As long as MR > 0, total revenue keeps increasing.
• When MR = 0, total revenue is at its peak (revenue maximization point).
• Beyond this, MR becomes negative → total revenue falls.
• MR = 0 is the highest possible revenue point! 🚀

Question 8

What is sales maximisation in theory?

Answer 8

• Managers prioritize company growth over profit as their salary and prestige may depend on it.
• Growth is easier to measure than profit and boosts the firm’s reputation.
• Larger firms are more stable, surviving tough times better.
• Growth increases market share & power, possibly pushing out competitors.
• Short-term strategy—in the long run, firms tend to focus on profit maximization.

Netflix and Spofity follow the objective of sales maximisation

Question 9

Where is sales max on a diagram?

Answer 9

Where AC = AR

Question 10

Why is sales max at AC = AR

Answer 10

**In order to sales maximise, the firm will want to get the highest level of sales possible without making a loss. **

They will want to ensure sufficient returns to keep the owners happy, so will aim for normal profits.

As a result, they produce where AC=AR

Question 11

What is satisficing?

Answer 11

• Managers aim to make enough profit to keep owners happy while maximizing their own benefits (e.g., higher salaries, perks).
• Due to the principal-agent problem, managers may not profit maximize but instead follow profit satisficing, making just enough profit to avoid criticism and keep their jobs.
• The needed profit varies yearly, depending on industry norms and other firms’ profits.

Satisficing is essentially a compromise between revenue maximization and profit maximization.