Key Diagrams - Profit Satisficing as a Business Objective
- A-Level, IB
- AQA, Edexcel, OCR, IB, Eduqas, WJEC
Last updated 22 Apr 2022
In this video we work through the diagram that shows the price and output that might result if a business profit satisfices.
Profit satisficing occurs when there is a separation between ownership and control in a business and where managers may make decisions that take a firm away from the orthodox assumption of pure profit maximisation.
Profit satisficing occurs where owners of a business set a minimum acceptable level of achievement in terms of profit / return on capital. But this gives managers some autonomy in how they price in different markets. It usually involves setting lower prices perhaps in a bid to increase revenue & market share.
When drawing the profit satisficing diagram, remember that there is no unique price and output. Much depends on the minimum requirements set by shareholders. And also, the degree to which a market is contestable and there is a threat of “hit and run” entry.
Satisficing is a decision-making process that strives for adequate rather than perfect results. It is linked to behavioural theories of the firm. Consider for example, business responses to the pandemic. Many have changed their business models away from pure profit maximisation.
Surviving in fast-changing and challenging conditions has – for many – become a paramount objective.