Economics Section 4.1.5- Market Structures
Business Objectives
Different firms have different objectives
There are many reasons for this, including:
1) There may be information constraints (e.g. may be lack of accurate info about MC and revenues)
2) Small businesses have different objectives (e.g. some may be only for lifestyle)
3) State-owned firms may have different economic, social and political objectives
Two different types of people when setting objectives:
1) MAXIMISERS- always try to make the best possible choice from the available alternatives
2) SATISFICERS- look at a limited set of alternatives and choose best one from that
, REVENUE MAXIMISATION
- When MR=0 (PED=1)
- Companies geared towards maximising revenue are more likely to make frequent use of price
discrimination to extract extra revenue and marginal profit from consumers
-May be used as a way to deter the profitable entry of new firms
-However, the firm's share price may decrease due to the lower profits
SALES MAXIMISATION
-When AR=AC
-Normal profits are generated
-Maybe used as a way to increase market share
PROFIT SATISFICING
-Any point between profit maximisation and sales maximisation
-When firms are sacrificing some total profit for gains in other objectives, e.g. revenue or market share
MARKET SHARE
-Through the maximisation of sales
-Particularly true in oligopolistic markets, eg. petrol
EVALUATION OF A FIRM'S OBJECTIVES
-Most commercial firms are profit-seeking but not maximisers (sacrificing is most common)
-Actual and potential threat of competition affects behaviour greatly in imperfect, contestable markets
-Firms are also increasingly trying to improve social value, such as dividends to shareholders and working
conditions (in developing countries)
Divorce between Ownership and Control
SHAREholders are people who ave an equity stake in the business, interested in way which will grow the
value of their shareholding, e.g. through capital gain and dividends
STAKEholders are any people who have a vested interest in the actions and results of a firm, e.g.
Employees, Customers, Shareholders, Managers
Business Objectives
Different firms have different objectives
There are many reasons for this, including:
1) There may be information constraints (e.g. may be lack of accurate info about MC and revenues)
2) Small businesses have different objectives (e.g. some may be only for lifestyle)
3) State-owned firms may have different economic, social and political objectives
Two different types of people when setting objectives:
1) MAXIMISERS- always try to make the best possible choice from the available alternatives
2) SATISFICERS- look at a limited set of alternatives and choose best one from that
, REVENUE MAXIMISATION
- When MR=0 (PED=1)
- Companies geared towards maximising revenue are more likely to make frequent use of price
discrimination to extract extra revenue and marginal profit from consumers
-May be used as a way to deter the profitable entry of new firms
-However, the firm's share price may decrease due to the lower profits
SALES MAXIMISATION
-When AR=AC
-Normal profits are generated
-Maybe used as a way to increase market share
PROFIT SATISFICING
-Any point between profit maximisation and sales maximisation
-When firms are sacrificing some total profit for gains in other objectives, e.g. revenue or market share
MARKET SHARE
-Through the maximisation of sales
-Particularly true in oligopolistic markets, eg. petrol
EVALUATION OF A FIRM'S OBJECTIVES
-Most commercial firms are profit-seeking but not maximisers (sacrificing is most common)
-Actual and potential threat of competition affects behaviour greatly in imperfect, contestable markets
-Firms are also increasingly trying to improve social value, such as dividends to shareholders and working
conditions (in developing countries)
Divorce between Ownership and Control
SHAREholders are people who ave an equity stake in the business, interested in way which will grow the
value of their shareholding, e.g. through capital gain and dividends
STAKEholders are any people who have a vested interest in the actions and results of a firm, e.g.
Employees, Customers, Shareholders, Managers
