- Profit maximisation
- Profit maximisation is producing the quantity of output at which total revenue exceeds total cost by the largest amount.
- Satisficing
- Satisficing is aiming for a result that is good enough to keep the firm's owners and other groups content, rather than the largest profit possible.
Objectives a firm may pursue
Can you name the five objectives a firm might pursue other than the most profit?
Economics assumes profit maximisation, but a firm can chase the largest revenue, the largest sales or the fastest growth, or aim for something other than the most of anything.
Revenue maximisation is producing where total revenue is largest, where marginal revenue is zero, often because managers' pay or status rises with revenue.
Can you think of an example?
A software firm's directors earn bonuses tied to turnover. They cut the subscription price until one more sale would add nothing to revenue, well past the most profitable price.
Sales maximisation is selling as many units as possible without making a loss, which means producing where average revenue equals average cost.
Can you think of an example?
A new food-delivery app prices so low that it only just covers its costs, to sign up as many customers as it can before its rivals do.
Growth as an objective is making the firm larger, in output, market share or size, often at the expense of profit today.
Can you think of an example?
A coffee chain opens branches in every town it can, accepting thin profits for years so that no rival can build a network as large.
Satisficing is aiming for enough profit to keep the owners content while pursuing other aims, often because those who run it are not its owners, or value other things.
Can you think of an example?
A family-owned bakery could raise profit by working staff harder and cutting quality, but the owners are happy with a steady living and a good name locally.
Corporate social responsibility is a firm choosing to take account of its workers, its community and the environment, beyond what the law requires, even at some cost to profit.
Can you think of an example?
A clothing firm pays its suppliers above the going rate and checks their factories for safety, raising its costs in return for a better reputation.