Business Objectives Flashcards
What are the main business objectives for firms?
1) Profit maximisation
2) Sales maximisation
3) Revenue maximisation
What is profit maximisation and when does it occur?
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
How can you evaluate profit maximisation?
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
What is revenue maximisation and when does it occur?
When firm seeks to make as much revenue as possible
Occurs when MR = 0
Why is revenue maximised when MR = 0?
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
What is sales maximisation?
When firms attempts to sell as much as it can without making a loss (needs to make normal profit- meet production costs)
When does sales maximisation occur?
Occurs when average total costs (AC) = average revenue (AR)
SEE FIGURE 10 PAGE 22 THEME 3 BOOK
What is revenue maximisation also known as?
Sales revenue maximisation
Why may firms choose to maximise sales or revenue?
1) gain ⬆️ market share
2) drive out rival from industry
What are other motives for firms and define them?
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 ⏰
What does an allocative efficiency diagram look like?
See top of page 23- Theme 3 book
What are the 2 main pricing strategies?
1) Predatory pricing
2) Limit pricing
What is predatory pricing?
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
What is limit pricing?
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 🇬🇧
What are the impacts of limit and predatory pricing on consumers (potential evaluation)?
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
What are other pricing strategies a firm might use?
1) Price discrimination
2) Discount pricing- e.g. ‘buy 1 get 1 free’-> ⬆️ consumer loyalty-> ⬆️ long run profits
What is non-price competition?
Any action by firm that ✖️ involve changing price- alternative to limit and predatory pricing- aims to ⬆️ sales or profits
What are examples of non-price marketing strategies?
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
What is the aim of non-pricing strategies?
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)
What are evaluation points for non-pricing strategies?
- 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
What is important to remember about the long and short run when talking about pricing and non-pricing strategies?
Profits MOST likely to ⬆️ in long run AND ✖️ in short run- may even ⬇️ in short run
