Theme 3 Topic 2

Question 1

Examples of business objectives

Answer 1

1. Sales maximisation
2. Profit satisficing
3. Revenue maximisation
4. Profit maximisation

Question 2

Context for business objectives

Answer 2

2016 - 1000s of people queue at midnight to buy the new PS3 - 1 million sold in 24 hrs.

Question 3

Sales maximisation formula

Answer 3

AC = AR

Question 4

In what ways does sales maximisation help a business

Answer 4

1. Increased market share so increased brand image
2. Drive a rival out an industry
3. If the business is aiming to sell products for social, ethical reasons (e.g. charity)
4. Will benefit manager if he has a sales target and is paid according to this

Question 5

Predatory pricing strategy

Answer 5

Way a business can achieve sales maximisation.
They price extremely low to drive out other firms.
When those firms do leave, the business then charges higher prices.
However, this is an anti competitive practice and may lead to fines by competition authorities.
Another reason to cut prices (limit pricing) is to discourage the entry of new businesses.
New smaller businesses would not be able to compete with such low prices.

Question 6

Context points for sales maximisation

Answer 6

1. Maximising sales at Tesco’s as they sell a Turkey at Thanksgiving at the same price as their costs, so the other sides are bought with it
2. Netflix and Spotify follow this objective, as they attempt to increase the size of their business

Question 7

Problem with sales maximisation

Answer 7

Leads to a fall in price, which other firms may copy so there may be little or no increase in sales.
This is important in oligopoly.

Question 8

Profit maximisation formula

Answer 8

MR = MC

Question 9

Sales maximisation définition

Answer 9

This is when a business sells as much as possible without making a loss.

Normal profits are made

Question 10

Profit maximisation définition

Answer 10

Profits are maximised at an output where marginal cost = marginal revenue

Question 11

Profit maximisation

Answer 11

The firm is making the most money relative to its cost.
Shareholders will want to see profits maximised as this maximises dividends.
Managers will aim for profit maximisation to keep shareholders happy and also looks more attractive to future shareholders.
Profits can be put back into the business (retained profit) for investment.

Question 12

What can a business use to increase profits ?

Answer 12

Cost plus pricing (adding a % mark up to costs to ensure profits are being made)

Question 13

Profit maximisation graph analysis :

Answer 13

If they produce less = producing more increases profits since MR > MC so they’re making more in revenue than it costs to produce the goods, so profits increase

If they produce more = they are making a loss on the goods produced above the profit maximisation point so they should decrease production

Question 14

Context for profit maximisation

Answer 14

Apple and pharmaceutical companies are likely to profit maximise since they need the money to reinvest.

Question 15

Revenue maximisation

Answer 15

Revenues are maximised at an output where marginal revenue = zero

Question 16

Revenue maximisation formula

Answer 16

MR = 0

Since no more revenue can be achieved from selling an extra unit of output

Question 17

Revenue maximisation - irrational

Answer 17

Seen as an irrational aim as it doesn’t take into account costs of a business so may not lead to profit.

Question 18

Context for revenue maximisation

Answer 18

Amazon follows an objective of revenue maximisation, with revenue nearing £120 bn in 2015 but profits stay relatively stable.
Aim is to dominate the market.

Question 19

Revenue maximisation is logical for certain people

Answer 19

1. Businesses with perishable goods (something that deteriorates)
2. Managers may be paid based on revenue so reasonable aim for managers
3. If a firm is to be taken over by another business, it could be valued by its revenue, so firms may try to maximise revenues to secure a higher sale price of their business

Question 20

Revenue maximisation graph analysis :

Answer 20

To revenue maximise, firms would produce where MR = 0, since if marginal revenue is above 0, producing more would increase revenue.

Question 21

Satisficing behaviour

Answer 21

Satisficing involves the owners of a business (shareholders) setting minimum acceptable levels of achievement in terms of revenue and profitability

Question 22

Profit satisficing

Answer 22

Some firms have the business objective of satisficing.
This often occurs as a result of the principal agent problem.
Rationally, managers know shareholders want to profit maximise.
Rationally, managers want to maximise sales or revenue so as to increase their wages.
Managers settle for a level of output somewhere between profit and sales maximisation.
This increases wages and reduced potential conflict with shareholders

Question 23

Context for profit satisficing

Answer 23

Lego spent 150 million dollars into renewable energy and making Lego recyclable.

Question 24

Social enterprises

Answer 24

Businesses with profits reinvested for social aims – profit, people and planet

Question 25

Evaluation

Answer 25

Most commercial businesses are profit seeking but not profit maximisers. Satisficing is the most common approach that businesses take across markets. Businesses get a feel from changing market conditions, and they learn from experience. Actual and potential threats from commercial rivals is important in the behaviour of businesses in imperfect markets. Increasingly, firms are giving greater emphasis to social value as well as narrow measures of shareholder returns (e.g. rate of return on capital).