Explaining Business Objectives

What are the main objectives of businesses? Why might businesses depart from the standard textbook aim of profit maximisation? This study note helps you to answer these questions.

Profit maximisation: Profits are maximised at an output level where marginal cost = marginal revenue (MR=MC)

Revenue maximisation: Revenues are maximised at an output where marginal revenue = zero

Sales maximisation: Supplying the largest output possible consistent with earning at least normal profits where AR=AC

Satisficing behaviour: Satisficing involves the owners of a business (shareholders) setting minimum acceptable levels of achievement of either revenue or operating profits

Reasons for Different Objectives (Goals)

• Managerial objectives / managerial utility
  • Revenue or sales growth is often preferred instead of profit maximisation
  • Achieve a satisfactory profit / return for shareholders to reward them for risk-taking
• Information constraints / gaps
  • Lack of accurate information on marginal cost & revenues in their markets
  • Cost-plus pricing (Average cost + variable profit) is a common pricing tactic – i.e. add a simple mark-up on the average cost, with the mark up being higher if demand is found to be price inelastic
• Small businesses / start-ups - different aims
  • Many small firms are life-style businesses for owners
  • Start-ups often target rapid growth of users rather than profit
• State-owned corporations
  • State-owned corporations are likely to have a range of different economic and political objectives