Business Objectives 3.2
Revenue- income generated from the sale of output in goods and services markets
Revenue maximisation- when MR = zero (i.e. when price elasticity of demand = 1)
Total revenue- refers to the amount of money received by a firm from selling a given level of output and is found by
multiplying price (P) by output i.e. number of units sold
Average revenue (AR)= average price per unit sold
Marginal Revenue (MR)= The change in revenue from selling one extra unit of output
Marginal revenue product- measures the change in total revenue for a firm from selling the output produced by
additional workers employed
Sales maximisation- AR=AC
Profit maximisation - Profit maximisation occurs when marginal cost = marginal revenue (MC=MR)
Variable cost- business costs that vary directly with output since more variable inputs are required to increase output
Fixed costs- costs that don’t vary directly with level of output i.e. they are treated as exogenous or independent of
production
Marginal cost- the change in total costs from increasing output by one extra unit
Satisficing behaviour- maximising behaviour may be replaced by satisficing which in essence involves the owners
setting minimum acceptable levels of achievement in terms of revenue and profit.
Allocative efficiency- value that consumers place on good or service = cost of resources used up in production.
price = marginal cost.
Productive efficiency- a business in a given market or industry reaches the lowest point of its average cost curve.
Output is being produced at minimum cost per unit - efficient use of scarce resources, high level of factor productivity
Dynamic efficiency- occurs over time- focuses on changes in the consumer choice available in a market together with
the quality/performance of goods and services that we buy
Business ethics- concerned with the social responsibility of management towards the firms major stakeholder,
environ and society
Competitive advantage- when a company has an advantage over another
Corporate governance- practices, principles and values that guide a firm and its activities
CSR- companies integrate social and environmental concerns into their businesses operation and in interaction with
their stakeholders
Multinational- company with subsidiaries or manufacturing bases in several countries
Short termism- when a business pursues the goal of maximising s/t profits due to fear of being taken over or having
the stock market mark down the value
,
, Why objectives change over time
The main objectives of Netflix over time have changed as they’ve been able to grow and meet traditional
objectives such as survival, profit maximisation. As they’ve grown- focus on other objectives such as
innovation, competing against
§ Changing trends
§ External environment
§ Shareholders
§ Principal agency problem
Reasons for different objectives:
Managerial objectives / managerial utility
§ Revenue or sales growth instead of profit maximization
§ Achieve a satisfactory profit / return for shareholders
Information constarints:
§ Lack of accurate information on marginal cost & revenue
§ Cost-plus pricing (AC + variable profit) is a common tactic
1. Information gaps
2. Political lobbying
3. Different stages of the economic cycle
4. Nationalisation vs privatisation
Overview on objectives and pricing
• Objectives often driven by managerial motives
• Interdependent behavior in an oligopoly
• Most businesses are satisficers
• Regulatory interventions do matter
• More firms use big data to drive revenues
• Consumers are sensitive to fair / ethical pricing
Revenue- income generated from the sale of output in goods and services markets
Revenue maximisation- when MR = zero (i.e. when price elasticity of demand = 1)
Total revenue- refers to the amount of money received by a firm from selling a given level of output and is found by
multiplying price (P) by output i.e. number of units sold
Average revenue (AR)= average price per unit sold
Marginal Revenue (MR)= The change in revenue from selling one extra unit of output
Marginal revenue product- measures the change in total revenue for a firm from selling the output produced by
additional workers employed
Sales maximisation- AR=AC
Profit maximisation - Profit maximisation occurs when marginal cost = marginal revenue (MC=MR)
Variable cost- business costs that vary directly with output since more variable inputs are required to increase output
Fixed costs- costs that don’t vary directly with level of output i.e. they are treated as exogenous or independent of
production
Marginal cost- the change in total costs from increasing output by one extra unit
Satisficing behaviour- maximising behaviour may be replaced by satisficing which in essence involves the owners
setting minimum acceptable levels of achievement in terms of revenue and profit.
Allocative efficiency- value that consumers place on good or service = cost of resources used up in production.
price = marginal cost.
Productive efficiency- a business in a given market or industry reaches the lowest point of its average cost curve.
Output is being produced at minimum cost per unit - efficient use of scarce resources, high level of factor productivity
Dynamic efficiency- occurs over time- focuses on changes in the consumer choice available in a market together with
the quality/performance of goods and services that we buy
Business ethics- concerned with the social responsibility of management towards the firms major stakeholder,
environ and society
Competitive advantage- when a company has an advantage over another
Corporate governance- practices, principles and values that guide a firm and its activities
CSR- companies integrate social and environmental concerns into their businesses operation and in interaction with
their stakeholders
Multinational- company with subsidiaries or manufacturing bases in several countries
Short termism- when a business pursues the goal of maximising s/t profits due to fear of being taken over or having
the stock market mark down the value
,
, Why objectives change over time
The main objectives of Netflix over time have changed as they’ve been able to grow and meet traditional
objectives such as survival, profit maximisation. As they’ve grown- focus on other objectives such as
innovation, competing against
§ Changing trends
§ External environment
§ Shareholders
§ Principal agency problem
Reasons for different objectives:
Managerial objectives / managerial utility
§ Revenue or sales growth instead of profit maximization
§ Achieve a satisfactory profit / return for shareholders
Information constarints:
§ Lack of accurate information on marginal cost & revenue
§ Cost-plus pricing (AC + variable profit) is a common tactic
1. Information gaps
2. Political lobbying
3. Different stages of the economic cycle
4. Nationalisation vs privatisation
Overview on objectives and pricing
• Objectives often driven by managerial motives
• Interdependent behavior in an oligopoly
• Most businesses are satisficers
• Regulatory interventions do matter
• More firms use big data to drive revenues
• Consumers are sensitive to fair / ethical pricing
