Explaining Business Objectives

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