3.2 - Business Objectives - Coggle Diagram
3.2 - Business Objectives
There are two ways to look at profit maximisation
The point at which the total revenue and cost are the furthest apart.
Here you can see that the firm is making a profit but could make more. The zone where MR is greater than MC is the profit zone. This is why firms tend to sell where MC = MR because they have maximised the total profit.
Where the MR is equal to the MC
MR = MC = P is
Here the firm makes no profit on the last good but has maximised the profit zone so overall has made profit on all the good before it
- Marginal revenue is the change in revenue from selling one extra unit. Usually, the price is constant (especially with normal profit) so MR = P. Effectively it's how much you sell that good for
This can be positive or negative. When its positive the price is elastic and when its negative the price is inelastic
MR curve is the gradient of the TR (total revenue curve). When the TC peaks, the MR curve hits 0. When the TR is declining (the firm is losing money on each extra unit sold, the MR curve is negative
- marginal cost is the cost of making one more unit of output.
Its always positive and always rises in the short run
MC curve is equal to the gradient of the TC curve
While is it is rational to profit maximize for the firm. Not all firms do. This is mostly commonly seen in oligopolies and monopolies
If all the costs of a firm was ignored, or there were no variable costs, then a firm may aim to maximise revenue rather than maximise profit.
Here the firm would cut prices until MR = 0. They have maximised / peaked on the revenue curve
While this may not seem rational. There are some circumstances where it may be a reosnable choice
If a firm is going to have to sell of all its stock
(if they are presibale or undiarable the next day) then the seller will want to get back at least some of the costs rather than nothing.
If the manager and owner are different people
. For example the owner would want to maximise profit but the manager, who controls how much is produced, may be given a bonus on how much he sells so he would want to revenue maximise.
If a firm is about to sold and will be valued on its revue
. Then the owners may wish to boost the value to obtain more from buyer by maximising revue.
This is where the firm aims to sell as much as possible. in order to do this the firm will almost always have to lower the price
This is often a short run policy. In the long run the firm would often want to return to profit maximisation
This is also irrational however, there are two scenarios where this could beneficial for the firm.
One being to
avoid the attention of the CMA
. The CMA often looks at firms making the most profit so lowing prices may take them of the CMA's rader.
The other is to
prevent new entry of other firms
. High profit will always attract other firms. By lowering the price, and therefore the profit, other firms may be deterred from entering the market.
This is making enough money to keep shareholders happy.
This may happen if the owner or manager wants to
Run a firm with low risk.
Keep profits down to prevent enticing people to takeover the company
Achieve other objectives
When this happens, we assume there is a disconnect between the owner and manager otherwise a rational firm would profit maximize.