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A) Business Objectives

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73 views4 pages

A) Business Objectives

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Anousha
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Edexcel A-level Economics (A)

3.2.1 Business objectives

Different business objectives and reasons for them

Profit maximisation:

A firm’s profit is the difference between its total revenue (TR) and total costs (TC). A
firm profit maximises when they are operating at the price and output which derives
the greatest profit. Profit maximisation occurs where marginal cost (MC) = marginal
revenue (MR). In other words, each extra unit produced gives no extra loss or no
extra revenue.

Profits increase when MR > MC. Profits decrease when MC > MR.
Some firms choose to profit maximise because:

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Edexcel A-level Economics (A)

o It provides greater wages and dividends for entrepreneurs


o Retained profits are a cheap source of finance, which saves paying high
interest rates on loans
o In the short run, the interests of the owners or shareholders are most
important, since they aim to maximise their gain from the company.
o Some firms might profit maximise in the long run since consumers do not like
rapid price changes in the short run, so this will provide a stable price and
output.

Revenue maximisation:

This occurs when MR = 0. In other words, each extra unit sold generates no extra
revenue.

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Edexcel A-level Economics (A)

At the point Q P1, the firm is operating at MR=0, where revenue maximises. The
curve shows how the point of maximum total revenue is MR =0.

Sales maximisation:

This is when the firm aims to sell as much of their goods and services as possible
without making a loss. Not-for-profit organisations might work at this output and
price. On a diagram this is where average costs (AC) = average revenue (AR).

An example of sales maximising is Amazon’s Kindle launch. They sold as many


Kindles as possible to gain market share, so they can earn more profits in the long
run. It helps keep out and deter competitors.

This diagram summarises each objective.

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Edexcel A-level Economics (A)

Satisficing:

Another objective a firm might have is satisficing. A firm is profit satisficing when it
is earning just enough profits to keep its shareholders happy.

Shareholders want profits since they earn dividends from them. Managers might not
aim for high profits, because their personal reward from them is small compared to
shareholders. Therefore, managers might choose to earn enough profits to keep
shareholders happy, whist still meeting their other objectives.

This occurs where there is a divorce of ownership and control.

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