Chapter 3- Business Objectives

Profit Maximisation

The primary objective of a business to achieve the highest possible level of profit, defined as total revenue minus total costs.

Marginal Revenue

The additional revenue generated from selling one more unit of a good; profit is maximised when marginal revenue equals marginal cost.

Average Revenue (AR)

The revenue earned per unit sold, calculated as total revenue divided by quantity sold; it represents the demand curve.

Revenue Maximisation

The point at which total revenue is at its highest, occurring when marginal revenue equals zero.

Sales Maximisation

The objective of producing as many goods as possible without incurring a loss, where average revenue equals average costs.

Satisficing

sacrificing profits in order to satisfy the needs and expectations stakeholders

Principal-Agent Problem

A situation where the interests of the business owners (principals) and managers (agents) diverge, leading to potential inefficiencies.

Corporate Social Responsibility (CSR)

refers to a business's commitment to act ethically and consider its social, environmental, and economic impacts—not just profit.

Total Cost (TC)

The sum of fixed and variable costs incurred by a firm in production.

Average Total Cost (ATC)

The total cost per unit of output, calculated as total costs divided by quantity produced.

Marginal Cost (MC)

The cost of producing one additional unit of output.

Economies of Scale

Cost advantages that firms experience as they increase their level of production, leading to lower average costs.

Diseconomies of Scale

Increased average costs that occur when a firm becomes too large and inefficient, often due to communication and coordination issues.

Minimum Efficient Scale (MES)

The lowest level of production at which a firm can achieve the lowest average costs and fully utilise economies of scale.

Accounting Profit

The difference between total revenue and total costs, often used in everyday discussions of profit.

formula for marginal cost

change in total cost/ change in quantity

When does profit maximising occur?

MC=MR

Why might firms want to profit maximise?

to reinvest,dividends for shareholders, lower costs and lower prices for consumers.

why might firms want to sales maximise?

economies of scale, limit pricing(competitiveness), principle agent problem, to flood the market

why might firms want to revenue maximise?

economies of scale, predatory pricing, principle agent problem

The law of diminishing returns

an additional factor of production results in a lessening output or impact

what are the types of internal economies of scale?

purchasing, technical , financial, risk bearing economies and managerial

what are the types of internal diseconomies of scale

communication and cordination diseconomies, employee motivation diseconomies, principle agent

what are the types of external economies of scale?

transportation and communications economies, skilled labour economies, research economies

what are the types of external diseconomies of scale?

transportation and communication diseconomies, supply of workers diseconomies, resource competition diseconomies

what is the law of diminishing marginal productivity

when a variable factor is added to fixed factors of production, the marginal product (MP) will initially increase, but eventually decrease

what is economic profit

includes the opportunity cost involved in gaining revenues

what is normal profit

lowest amount of profit required for a firm to stay in the market(Ac=Ar)

what is supernormal profit

any profits earned over and above normal profits(Ac>Ar)