3.2.1 Business objectives

What are the 4 business objectives?

• Profit Maximisation

• Revenue Maximisation

• Sales Maximisation

• Satisficing

At what point does profit maximisation occur?

MC=MR

Draw the profit maximisation point on a diagram

Why do firms profit-maximise? (4)

• Dividends to distribute to shareholders, CEOs and owners.

  • Pressure from shareholders as they vote on directors at annual general meetings (AGM)

• Bonuses to CEOs and Managers

• Reinvestment into the firm → Research and development for future profits

  • Business expansion

• Firm survival in a competitive atmosphere

  • Owners do not want to fund losses; the bank may stop lending

What happens if firms produce beyond the profit-maximising price? (2)

• The cost of producing one extra unit will exceed the revenue gained from one extra unit

• Results in higher costs and lower profits

At what point does revenue maximisation occur?

MR=0

Draw the revenue maximisation point on a diagram

Why would firms want to maximise revenue? (6)

• Economies of Scale (LR)

• To deter new entry (reduce price, increase quantity and market share) 

  • Over time, rivals might leave the market, reducing competitive pressure and making demand more price-inelastic

• Avoid the CMA, which might investigate anti-competitive behaviour

• Create brand loyalty + win customers

• Amazon follows an objective of revenue maximisation to dominate the market and create brand recognition

• The principal-agent problem

  • Managers are rewarded bonuses and incentives based on revenue they bring to the firm

At what point does sales maximisation occur?

AC=AR

Draw the sales maximisation point on a diagram

(point B)

Why would firms want to maximise sales? (6)

• Economies of Scale (SR)

• Deter new entry → charge a limit price, as there are no supernormal profits to be made

• Start up and create brand awareness → Deliveroo, Uber, Amazon Kindle

• Win more market share → more aggressive than revenue maximisation. E.g., Aldi, Lidl

• Build up monopoly power → price inelastic demand to raise prices in the future

• Public sector organisations → aim to allocate efficiently

At what point does profit satisficing occur?

Occurs anywhere between profit + sales maximising points

Why would a firm want to profit satisfice? (4)

• Due to the principal-agent problem, managers might make enough profits to satisfy owners while increasing their own benefit

• Enough for higher bonuses but also enough for shareholders

• Win market share but have enough for shareholders

• Avoid the CMA but have enough to reinvest

Where do profit maximisation and revenue maximisation overlap? (4)

• Industries where there are very large fixed costs and relatively small variable costs + also in natural monopoly 

• The additional cost or marginal cost of extra orders is therefore relatively small

• Short-run profit, therefore, becomes crucially dependent on how much revenue is gained

• E.g., airlines, trains, passenger ferries, and hotels