1.1.2 business objectives

What is profit maximisation?

When a firm aims to achieve the greatest possible difference between total revenue (TR) and total cost (TC)

Where does profit maximisation occur?

Where marginal revenue (MR) = marginal cost (MC)

When do profits increase or decrease?

Profits increase when MR > MC, decrease when MC > MR

Reasons firms might profit maximise

Greater wages/dividends for entrepreneurs, retained profits as cheap finance, satisfying short-term shareholder interests, stable prices and output

Why are PLCs keen on profit maximisation?

To keep shareholders happy with high dividends; usually a short-term focus

What is sales maximisation?

Selling as much as possible without making a loss (where average revenue AR = average cost AC)

What is satisficing?

Earning just enough profit to satisfy shareholders without aiming for maximum profit

When does satisficing occur?

When there is a divorce of ownership and control; managers’ rewards from profit are small

Survival

Ensuring the firm remains in the market during tough periods or economic decline

Market share

Increasing the percentage of the market a firm controls; often achieved via sales maximisation

Cost efficiency

Minimising average costs to gain competitive advantage and compete in competitive markets

Return on Investment (ROI)

Profit earned relative to investment; measures the attractiveness of an investment

Employee welfare

Ensuring employees are happy and productive, increasing loyalty; example: Google perks

Customer satisfaction

Improving product quality or service to enhance competitiveness and potentially charge higher prices

Social objectives/CSR

Acting ethically, taking responsibility for environmental/social impacts, maximising social welfare

Revenue maximisation

Where a firm aims to achieve the highest possible total revenue by producing and selling output where marginal revenue is 0