Business Objectives Flashcards
firm
an organisation that brings together factors of production in order to produce output
normal profit
the return needed for a firm to stay in the market in the long run
supernormal (abnormal or economic) profits
profits above normal profits
profit
TR-TC
profit maximisation
MC=MR
sales revenue maximisation
MR=0
sales volume maximisation
AC=AR
Examples of private sector firms
Tesco
Uber
Santander
Samsung
Examples of public sector firms
Network rail
Royal Bank of Scotland
profit maximisation occurs where
where MC=MR; more output is produced and sold until the extra cost incurred by one more unit of production exactly equals the revenue gained from that unit of production
long run objective
How may a firm sacrifice profit in the short run to maximise profit in the long run
- Maximise sales revenue by producing where MR = 0. Production is increased to a point where additional sales would reduce overall revenue because to make an extra sale the price of all such goods would have to be reduced.
- Maximise sales volume by producing where AC=AR. This is the highest level of sales that a firm can sustain in the long run; a higher level of sales would see AR<AC and the firm would make a loss.
- Maximising growth by increasing market share and the size of the firm. Cutting prices below cost will lead to a loss in the short run, but may lead to even higher long run profits. This is due to increased brand recognition or an ability to cut costs due to increased scale of operation (economies of scale).
Why may a firm try to maximise sales or revenue in the short run
- to increase its market share or to gain market power so that it can make monopoly profits in the long run.
- higher sales may make it easier to borrow money.
- Achieving these short run objectives could help to maximise profits in the long run
conventional theory of the firm anaylsis
assumes that businesses set a price that maximises their total profits, and have enough information, market power and motivation to. By default, we assume that firms will profit maximise, and stay in the market if they are making supernormal profit
Evaluation, profit maximisations realistic assumptions
- Information
Businesses know their costs and revenue based on market experience, so are best placed to calculate where MC=MR
- Single-product businesses
A business may only make a single product, such as…
Evaluation, profit maximisations unrealistic assumptions
- Imperfect information
It’s hard for a business to pinpoint their precise profit maximising output, as they cannot accurately calculate marginal revenue and marginal cost
- Multi-product businesses
Most businesses are multi-product firms operating in a range of markets across countries and continents – the sheer volume of information that they have to handle is vast. And they must keep track of the ever-changing preferences of consumers.
- Ignores time
To maximise profits in the long run may, in the short run, require not producing at MC=MR to capture market share and raise prices to increase profits later