Business Objectives

Question 1

What are the main business objectives for firms?

Answer 1

1) Profit maximisation
2) Sales maximisation
3) Revenue maximisation

Question 2

What is profit maximisation and when does it occur?

Answer 2

Output level where supernormal profits are at greatest (or losses at lowest)
Occurs when MC = MR AND when MC is rising … marginal profit = 0 here as ✖️ extra profit made by selling 1 more/1 less unit of output

Question 3

How can you evaluate profit maximisation?

Answer 3

1) Most local shops 🏬✖️ know marginal cost of producing a 🚘/🧹
2) Even if shops knew what their profit maximising output was, they ✖️ all of a sudden 🛑✋ selling the next item if knew would cause ⬇️ in total profit … some firms look to other objectives e.g. sales maximisation

Question 4

What is revenue maximisation and when does it occur?

Answer 4

When firm seeks to make as much revenue as possible

Occurs when MR = 0

Question 5

Why is revenue maximised when MR = 0?

Answer 5

As firm ⬆️ output, MR declines BUT when as long as MR ➕, it adds to TR
BUT when MR becomes ➖ and goes below 0, TR begins to ⬇️
MR = gradient of TR curve … when MR = 0, TR at peak
WHEN MR = 0 it means that the revenue earned from selling 1 extra unit of output is 0 … no ⬆️ to TR hence why maximised

SEE TOP OF PAGE 22 THEME 3 BOOK

Question 6

What is sales maximisation?

Answer 6

When firms attempts to sell as much as it can without making a loss (needs to make normal profit- meet production costs)

Question 7

When does sales maximisation occur?

Answer 7

Occurs when average total costs (AC) = average revenue (AR)

SEE FIGURE 10 PAGE 22 THEME 3 BOOK

Question 8

What is revenue maximisation also known as?

Answer 8

Sales revenue maximisation

Question 9

Why may firms choose to maximise sales or revenue?

Answer 9

1) gain ⬆️ market share

2) drive out rival from industry

Question 10

What are other motives for firms and define them?

Answer 10

1) Allocative efficiency- producing at point where price of a 🚘 = marginal cost of production (cost of FOP used to produce that 🚘)
2) Satisficing- making just enough profit to keep stakeholders happy (shareholders, employees, managers, customers etc), allowing other motives to then be pursued
3) Long run profit maximisation with short term increased market dominance as a primary motive-> ⬆️ profits over ⏰

Question 11

What does an allocative efficiency diagram look like?

Answer 11

See top of page 23- Theme 3 book

Question 12

What are the 2 main pricing strategies?

Answer 12

1) Predatory pricing

2) Limit pricing

Question 13

What is predatory pricing?

Answer 13

Pricing below costs to drive out other firms- short run loss BUT profit in long run as other firms leave AND prices ⬆️ to levels ✖️ possible with competition
Anti-competitive practice- can-> fines by competition authorities

Question 14

What is limit pricing?

Answer 14

Pricing at level low enough to discourage entry of new firms- price of 🚘 below level sustainable by new firm
Exploits economies of scale that growing firm in market experiences- ✖️ necessarily illegal in 🇬🇧

Question 15

What are the impacts of limit and predatory pricing on consumers (potential evaluation)?

Answer 15

Short run- benefit consumer via ⬇️ prices
Long run- when firm driven out rival firms- monopoly power gained- prices ⬆️ AND ⬇️ consumer choice -> ⬇️ consumer surplus (amount consumers are willing to pay above what they actually pay) BUT ⬆️ profits (LONG-RUN)- ALTHOUGH consumers ✖️ wish to pay- have ✖️ choice- firms has monopoly power- only firm in industry

Question 16

What are other pricing strategies a firm might use?

Answer 16

1) Price discrimination

2) Discount pricing- e.g. ‘buy 1 get 1 free’-> ⬆️ consumer loyalty-> ⬆️ long run profits

Question 17

What is non-price competition?

Answer 17

Any action by firm that ✖️ involve changing price- alternative to limit and predatory pricing- aims to ⬆️ sales or profits

Question 18

What are examples of non-price marketing strategies?

Answer 18

1) Advertising (includes placing product with celebrities)
2) ⬆️ investment in branding- e.g. loyalty cards etc (most department stores)
3) Packaging- e.g. free gifts 🎁 (Beats)
4) After care/customer service/warranties (John Lewis)
5) Quality and innovation
6) Product development
7) Mergers or acquisitions (firm buys another firm outright)- remove competition

Question 19

What is the aim of non-pricing strategies?

Answer 19

Shift average revenue (demand) curve to the ➡️ (… ⬆️ demand for 🚘 being sold) OR to prevent it from ⬇️ as other firms attempt to ⬆️ their market share- ⬆️ profits (LONG-RUN)
ALSO to ⬇️ PED by ⬇️ availability of substitutes without changing price … making PED ⬆️ inelastic (absolute terms)

Question 20

What are evaluation points for non-pricing strategies?

Answer 20

• Cost of non-price marketing strategy e.g. advertising MUST be ⬇️ than ⬆️ in supernormal profit for it to be beneficial
• other firms may ALSO ⬆️ their advertising or COPY the innovations introduced … minimising the effect
• ALSO spending large amounts of 💵 on advertising campaign -✖️ guarantee of success- does firm have enough money?
• ⏰ for non pricing strategy to come into effect

Question 21

What is important to remember about the long and short run when talking about pricing and non-pricing strategies?

Answer 21

Profits MOST likely to ⬆️ in long run AND ✖️ in short run- may even ⬇️ in short run