Business Objectives | A-Level Economics Notes
These revision notes cover everything you need to know about Business Objectives for A-Level Economics. They're designed for students studying AQA A-Level Economics, Edexcel A-Level Economics, and Edexcel International A-Level Economics. Written by Jaisul Naik, UCL Economics graduate and A-Level Economics tutor since 2017.
What is profit maximisation?
Profit maximisation occurs when a firm produces at the quantity where MC=MR.
What are two reasons why profit maximisation is the main business objective?
- profit can be used to pay shareholders,
- profit can be re-invested which can lead to innovation.
Explain why profit maximisation occurs at MC=MR
- Profit is maximised where MC = MR because at this point, the cost of producing one extra unit exactly equals the revenue it generates.
- If MR > MC, the firm should increase production as each additional unit adds more to revenue than costs, increasing total profit.
- Conversely, if MC > MR, the firm should reduce output as each additional unit costs more than it generates in revenue, reducing total profit.
What is revenue maximisation?
Revenue maximisation occurs when a firm produces at the quantity where MR=0.
What is the main benefit of revenue maximisation?
Revenue maximisation can be used as a strategy to increase market share. This can allow firms to benefit from increased brand loyalty and economies of scale,
What is sales maximisation?
Sales maximisation occurs when a firm produces at the quantity where AC=AR.
What is the main benefit of sales maximisation?
Sales maximisation can allow firms to fully exploit their economies of scale. This could be used as a strategy to lower costs in the market and drive competition away.
What is profit satisficing?
Profit satisficing is when a firm makes enough profit to keep shareholders happy, but they sacrifice some profits to meet other objectives such as manager sales targets and work satisfaction.
This happens as a result of divorce of ownership from control and the principal-agent problem. Owners leave managers in charge of the business, but owners and managers have different objectives.
Summary questions
- What is profit maximisation?
- What are two reasons why profit maximisation is the main business objective?
- Explain why profit maximisation occurs at MC=MR
- What is revenue maximisation?
- What is the main benefit of revenue maximisation?
- What is sales maximisation?
- What is the main benefit of sales maximisation?
- What is profit satisficing?
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