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3.7 - Firms' costs, objectives, and revenues - Coggle Diagram
3.7 - Firms' costs, objectives, and revenues
Objectives of firms
The main objectives of firms are
Survival
Often most important objectives for newly created firms
Also important for large firms during economic recession
Many firms, whether old or new are forced to close down, so Survival, however it may be is very important.
Profit maximization
Ultimate goal for firms is maximizing profit
Generate more revenue from its productive activities.
Choosing factor inputs, production methods, outputs and prices that will earn the firm maximum profit
Maximizing the diffrence between total costs and toal revenue
Aim to achieve long run profit maximization as earning profit maximization may take a long time.
This is because, Designing and making new products take time, capturing half of the market takes time and will initially reduce profits. May even cause a loss!
Long run profit maximization means after a period of growth, to earn a significant profit each year.
Why is profit important?
Reward for risk-taking. Motivates people to invest time and money in firms
Provides a source of finance: Profits can be reinvested, Can be used to expand scales of production and make new products. Find productive activities.
Measure of success and financial stability: Secure low-cost loans, attract investors and supply more capital.
Growth
Expensive to achieve, but in the long run will help boost profits
Increasing sales and market share to eventually increase the scale of production
-> Internal or external growth is a key objective
Firms enjoy economies of scale
Is easier if demand is rising
Benefits: Lower average costs, Increased sales and market share, Reducing market risks, Improved chances of survival.
Social welfare and environmental objectives
Address social and environmental issues rather than profit maximization
reinvest any profit or surplus revenue to activities promoting the firms social and environmental goals
Social enterprises
Maximize improvements in social and environmental well-being
Objectives
To support more disadvantaged people in society
Protect natural environment
Earn enough profit or surplus revenue to be invested to expand or improve social or environmental work
Definition and calculation of revenue
Firms earn revenue from sales of their goods and services to consumers, Total revenue is therefore