Business Objectives Flashcards
What are the 4 main business objectives?
- Profit maximisation MC=MR
- Revenue Maximisation MR=0
- Sales Maximisation AR=ATC
- Satisficing
At what point on a graph are profits Maximised?
- MR=MC
- Marginal Revenue = Marginal Costs
–> point at which revenue gained from selling one more unit (MR) = cost of producing one more unit (MC)
Define Total Revenue?
TR
- PxQ sold
Define Total Cost
TC
- Cost of producing a given output
- SR calculated by Total Fixed Costs + Total Variable Costs
Define Marginal Revenue
- Change in TR (total revenue) from one more unit of output
- Gradient of TR curve
Define Marginal Cost
- MC
- extra cost of making one more unit of output
- –>△TC/ △Q
- Always positive
- Gradient of TC curve
Define Marginal profit
- the extra profit gained from selling one more unit
- when Marginal profit is zero –> Firm maximising profit
Marginal profit = MR-MC
What is the assumed business objective of firms + why?
Profit maximisation MC=MR
- assumption of rational behaviour
What is Revenue Maximisation?
- Output where TR (total Revenue) is maximised
- Output where MR (Marginal Revenue) gained from selling one more unit is 0
–> MR=0
In what 3 situations is revenue Maximisation a rational business objective?
- If firm needs to dispose of all stock –> e.g. supermarkets selling food before sell-by-date, costs are not relevant
- Principle-agent problem –> firms owned + managed by different people –> managers wages / bonus may be according to revenue made by branch / firm
- Take over –> value of firms may be based of revenue, firm may maximise revenue to increase sale price
What is Sales Maximisation?
- Output were TC = TR
(Total Cost = Total Revenue) - Output where Average Revenue = Average Cost
Why would a firm make Sale Maximisation their business objective? (4 resons)
- Increase Market Share + Eliminate competition –> by cutting prices –> SR policy in LR return to profit maximising
- Avoid attention of CMA–> Firms making large amounts of profit may be investigated more
- Deter new firms from entering Market –> High level of profitability (SNP’s) may attract new firms, cutting prices prevents new entrees
- Perishable Goods –> cant sell soon
What is Profit Satisficing?
Making enough profit to keep shareholders happy, where managers can then pursue other objectives
What is Satisficing?
Reaching an acceptable level for each business goal e.g. profit, market share, revenue , environment etc.
- Occurs when business attempts to pursue several goals at same time
- Not attempting to maximise one thing
Name three reasons for satisficing?
- Principle-Agent problem –> separation of ownership and control –> managers have different objective to shareholders
- Firms may want profits kept down to avoid attention from CMA
- Managers may profit satisfice –> make enough profit to keep owners happy then pursue other objectives e.g. a hobby
