Types of Business Objectives and their Definitions:
- Profit Maximisation is when a business aims to generate the highest earnings possible. This is defined by producing at the output where a firm’s marginal cost equals marginal revenues i.e. MC = MR.
- Revenue Maximisation is when a business aims to maximise the total value of their sales. This is defined by producing at the output where marginal revenue equals zero. i.e. MR = 0
- Sales (Volume) Maximisation is when a business aims to maximise the number of goods sold without incurring a loss. This is defined by producing at the point where average revenue equals average costs i.e. AR = AC
- Satisficing is when a business aims to meet the expectations of its stakeholders (e.g. shareholders, employees, consumers, suppliers…), by generating an acceptable amount of profits rather than maximizing it.
Business Objectives Examples & Explanation:
Profit maximization is assumed to be the default business objective of most firms in Economics. However, firms can operate in a more strategic manner in the market. For example, Amazon made little to no profits from 1997-2015, when their total revenues grew from $0 to $100 billion. During that period, they sold Kindles at production cost in order to gain as much market share as possible by aiming for sales volume maximisation. As a result, they came to dominate the e-book market. Similarly, football clubs focus on winning games as long as they generate enough profits to operate (satisficing). They do not aim to maximise profits, or to generate a financial return to the club owner. The reason for buying a football club may most likely be due to its sentimental value or its ownership as a status symbol, as sometimes billions of dollars are spent on them and cannot be recovered. We can see different organisations/businesses can have different business objectives, although there is a trend for larger companies to embrace corporate social responsibility (be environmentally friendly, treat staff well etc.) and satisfice their stakeholders sustainably.
Business Objectives Notes with Diagrams/Graphs:
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The videos explain the different types of business objectives including profit, revenue and sales maximization, as well as satisficing. The left video is for A-Level and the right is for IB.