Profit Max, Rev Max, Sales Max, Satisficing Year 2 Micro (9)

Objective for all firms?

Profit Maximisation

Why do they profit maximise?

1) Reinvestment: Business can reinvest profit back into the business, new capital, technology, innovation, RnD

2) Dividends for Shareholders: Shareholders are owners of company so they get a large share of the profit as they are the ones who finance it.

3) Lower costs: Business keep costs low in order to keep profits high, and also pass on lower prices for consumers

4) Reward for entrepreneurship: risk taking activity, so maximising profit is the reward

Where does profit maximisation occur?

MC = MR, As long as marginal revenue is greater than marginal cost, then next unit will always generate profit

Why may businesses not profit maximise?

1) Not have knowledge of MC and MR

2) Greater scrutiny: if large profits, regulators and competition authority will look at it and may think your doing something dodgy. Therefore investigations can occur.

3) Key Stakeholders harmed

4) Other Objectives more appropriate like Profit Satisficing.

Profit Satisficing?

Satisficing occurs when a business sacrifices profits to satisfy as many key stakeholders as possible. If you go too hard of profit max, then key stakeholders (all of them listed in the next few cards) can be harmed.

Who will be happy with profit satisficing?

Shareholders and Managers will be happy

Who will not be happy with profit satisficing?

Consumers, workers, government, environmental groups

Revenue Maximisation?

This occurs when MR = 0

Why should you revenue max?

1) Economies of scale: Rev max is greater than profit max so greater growth and economies of scale and lower costs

2) Predatory pricing: Rev max price is lower than profit price, so firm undercuts their rivals and sacrifice their profits in order to drive out competitors

3) Principle Agent problem: Managers run the business more daily and owners wouldn’t know the details as managers may revenue max to get more bonuses or something.

Sales Maximisation?

Business wants to become as large as they can without making a loss. Where AC = AR

Why sales maximise?

1) Economies of Scale

2) Limit pricing: it is the limit price (price break even), new firms don’t enter, so limiting competition.

3) Principle Agent problem: Managers may use sales or growth as leverage to get more perks as they approach share holders

4) Flood the market: More people aware of your product and get more loyalty and then later change your strategy once your brand is out there.