profit max in progress
- reasons why profit max is the most realistic
- reasons why revenue max is the most realistic
- reasons why sales max is the most realistic
- reasons why profit satisficing is the most realistic
Profit maximisation is the most realistic business objective for a business owners. Maximising profits allow shareholders to pay themselves the most dividends. It can be achieved at the point q1 where marginal costs equal marginal revenue. At any quantity below q1, each extra unit of output generates more revenue than it costs. This incentivises them to produce more output. Then, at any level of output above q1, marginal cost exceeds marginal revenue. This suggests that producing one extra unit will cost the firm more than it generates in additional revenue. This incentivises firms to cut back on output. Therefore q1 is the quantity that maximises profit. As shareholders can pay themselves consistently high dividends, they are motivated to continue to take the risk of operating a business. Additionally, high levels of supernormal profit enables consistent re-investment, which can lead to business growth.
Revenue maximisation occurs at the quantity where marginal revenue equals zero (MR=0). Revenue maximisation can be a particularly realistic objective for businesses that are aiming to increase their market share or maintain a high market share. It allows firms to charge a lower price, compared to if they were profit maximising. This also acts a
- price wars
- barriers to entry
- limit pricing
It is an important objective for some businesses because their goal might be to increase their market share. As firms increase market share, especially in oligopoly markets, they can improve customer loyalty. Later, they might be able to act as a monopoly and maximise profits from this. Additionally, as firms maximise revenue, they can increase output more than they would if they were profit-maximising. As output rises, long-run average costs fall, a phenomenon known as economies of scale. For example, at higher output levels, firms can benefit from bulk purchasing.
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