Business Objectives (3.2.1) Flashcards
What are the four objectives of a business?
-Profit Maximisation
-Revenue Maximisation
-Sales Maximisation
-Satisficing
What is Profit Maximisation?
Refers to the process or goal of a company or firm to achieve the highest possible profit. It involves determining the optimal level of output and pricing that will maximize the difference between total revenue and total costs. Profits benefit shareholders as they receive dividends and also increase the underlying share price
What are dividends?
A sum of money paid each year by a company to its shareholders from its profits
What does Profit Maximisation being achieved look like? (MR/MC)
When Marginal cost= Marginal Revenue
This means no additional profit can be extracted by producing another unit of output
What is Marginal Cost?
The change in total costs resulting from an additional unit of output
What is Marginal Revenue?
The increase in revenue resulting from an additional unit of output
What do MC<MR + MC>MR mean?
MC< MR= additional profit can still be extracted by producing an additional unit of output
MC>MR the firm has gone beyond the profit maximisation level of output
What does the profit maximisation level of output often result in?
High prices for consumers
What does a cost and revenues diagram look like for Profit Maximisation? (MC,AC, D, MR)
Slide 5
Who does Profit Maximisation interest the most?
Owners or shareholders are the most important and therefore the goal of firms is to profit maximise in the short run, in order to maximise owners’ returns
What is Revenue Maximisation?
Refers to the strategy or objective of increasing a company’s total income from sales to the highest possible level, without necessarily focusing on profits. The goal is to generate the greatest amount of revenue.
Why do sales managers want Revenue Maximisation?
-Sales managers often receive commission on sales as part of their wages and this incentivises them to maximise sales
-Profit maximisation for shareholders becomes a secondary objective for the sales managers
Why do firms want revenue maximisation?
-Firms will also maximise revenue in order to increase output & benefit from economies of scale
-In the short-term firms may use this strategy to eliminate the competition as the price is lower than when focusing on profit maximisation
What is the point where there is revenue maximisation on a graph?
MR=0
What happens when MR>0?
Producing another unit of output will increase total revenue
What does a cost and revenues diagram look like for revenue maximisation? (MC,AC, D, MR)
Slide 6
What is Sales Maximisation?
Business strategy focused on increasing the total number of units sold, rather than maximizing profits or revenue. The goal is to achieve the highest possible sales volume, regardless of the associated costs or profitability in the short term. This strategy is often pursued for several reasons, such as gaining market share, building brand recognition, or achieving economies of scale.
Is Sales Maximisation more of a long-term or short-term business objective?
It’s typically more of a short-term or intermediate-term goal rather than a long-term sustainable objective. This is because sales maximisation is increasing the sales without thinking of profit and revenue and so doesn’t always align with the company’s long-term profitability or financial health.
Where does sales maximisation occur on a graph?
AC=AR
What does a cost and revenues diagram look like for sales maximisation? (MC,AC, D, MR)
Slide 7
What is satisficing?
Opting for a satisfactory level of profit rather than profit maximisation
What does satisficing often occur as a result of?
The principal agent problem.
-Rationally, managers know shareholders want to profit maximise.
-Rationally, managers want to maximise sales or revenue so as to increase their wages.
-Managers (who control the business) settle for a level of output somewhere between profit and sales maximisation.
-This increases their wages and reduces potential conflict with shareholders.
What is allocative efficiency?
Some firms, particularly nationalised industries, aim to maximise social welfare. This is done by producing where the value society place on the good is equal to the extra cost of producing that good (MC=AR) which achieves allocative efficiency
