A2  Micro:  Business  Objec2ves  

A  short  revision  webinar  covering  profit  maximisa5on,  changes  in  costs  and  revenues  and  pricing  with  different  business  objec5ves  

Revising  A2  Economics  (Micro)  

Build  lots  of  real  world  examples  into  your  notes  Common  industries  used  include  food  retailers,  u2li2es,  banks,  airlines,  technology  sectors  

Business  Objec2ves  

Aims  

Profits  

Revenue  

Growth  

Market  Power  

Social  Aims  

Reputa5on  

Survival  

Cash  Flow  

Managerial  Aims  

Share  price  

Profits  and  Profit  Maximisa2on  

The  Importance  of  Profit  

1.   Finance  for  investment:  Retained  profits  are  source  of  finance  for  companies  undertaking  investment  

2.   Market  entry:  Rising  profits  send  signals  to  other  producers  within  a  market  

3.   Demand  for  factor  resources:  Resources  flow  where  the  expected  rate  of  return  or  profit  is  highest  

4.   Signals  about  the  health  of  the  economy:  Rising  profits  might  reflect  improvements  in  supply-­‐side  performance.  Strong  profits  are  also  the  result  of  high  levels  of  demand.  

Profit  is  an  important  objec5ve  of  most  firms  

High  Rates  of  Return  in  Pharmaceu2cals  

Profit margin of top 10 global pharmaceutical companies in 2013

43%

24% 22% 21% 20% 19%

16%

11% 10% 10%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

45.0%

50.0%

Pfizer (U.S.)

Roche (CH)

AbbVie (U.S.)

GSK (UK) Eli LillyEli Lilly (U.S.)

Johnson & Johnson

(U.S.)

Novartis (CH)

Sanofi (France)

Astra Zeneca

(UK)

Merck (U.S.)

Pro

fit m

argi

n

Research  Spending  in  Pharmaceu2cals  

Top global pharmaceutical companies by prescription sales and R&D spending in 2013 (in billion U.S. dollars)

9.36  

6.25  

8.29  

6.12  

7.12  

5.04  

5.81  

4.27  

5.32  

2.83  

3.94  

1.42  

2.71  

2.09  

46.02  

45.01  

39.14  

37.7  

37.52  

33.06  

26.48  

24.52  

20.12  

18.79  

18.19  

17.56  

15.59  

14.89  

0   5   10   15   20   25   30   35   40   45   50  

Novar5s  (Switzerland)  Pfizer  (U.S.)  

Roche  (Switzerland)  Sanofi-­‐Aven5s  (France)  

Merck  (U.S.)  GlaxoSmithKline  (UK)  

Johnson  &  Johnson  (USA)  AstraZeneca  (UK)  

Eli  Lilly  (U.S.)  Abbvie  (U.S.)  Amgen  (U.S.)  Teva  (Israel)  

Bayer  (Germany)  Novo  Nordisk  (Denmark)  

Sales/spending  in  billion  U.S.  dollars  

Research  and  development  spending   Prescrip5on  sales  

The  Concept  of  Marginal  Profit  

Marginal  profit  is  the  increase  in  profit  when  one  more  unit  is  sold  

MC  Cost  

Output  

MR  

Marginal  profit  is  posi5ve  

Marginal  profit  is  nega5ve  

Profit  Maximisa2on  

MC  Cost  

Output  

AC  

MR  

AR  

(MR=MC)   Q1  

Total  profit  is  maximised  when  marginal  revenue  =  marginal  cost  

Profit  Maximising  Price  and  Total  Profit  

MC  Cost  

Output  

AC  

MR  

AR  

(MR=MC)   Q1  

P1  is  the  profit  maximising  price;  total  profit  =  (P1  –  C1)  Q1  

P1  

C1  

Profit  

Economic  Losses  (Sub  Normal  Profit)  

MC  

Output  

AC  

MR  AR  

C1  

Q1  

P1  

Cost  and  Price  

Shut  Down  Price  in  the  Short  Run  

MC  

Output  

AC  

MR  AR  

Q1  

AVC  

C1  

Cost  and  Price  

P1  

Shut  Down  Price  in  the  Short  Run  

Cost , Price

Quantity of output

MC

AC

AVC

P2

P1

P1:  Price  =  average  cost,  normal  profits  made  

P2:  Price  =  average  variable  cost   P=Min  AVC  is  the  shut  down  

price  for  a  compe55ve  firm  in  short  run  

The  Shut-­‐Down  price  is  mainly  a  short  run  concept  

Prices  and  Profits  with  Economies  of  Scale  

Cost & Price

Output (Q)

Internal Economies of Scale shown by the drop in average and marginal cost from MC1

and AC1 to MC2 and AC2

AC1

AC2

MC1

MC2

AR

MR

The  profit  maximising  price  when  costs  are  high  is  P1  and  Q1    When  internal  economies  of  scale  are  achieved,  the  profit-­‐maximising  price  falls  to  P2  and  output  expands  to  Q2    Economies  of  scale  mean  lower  prices  for  consumers      And  higher  profits  for  producers          

P1

Q1

P2

Q2

C2

Supernormal  profit  at  price  P2  

Economies  of  scale  lead  to  higher  supernormal  profits  

Different  Business  Objec2ves  

Profit  Maximisa5on  

Sales  Revenue  Maximisa5on  

Business  Growth  /  Market  Power  

Business  Survival   Not  For  Profit  Social  Enterprises  

State-­‐Owned  Businesses  

Protec5ng  an  exis5ng  Market  

Posi5on  

Business  survival  in  hard  5mes  

Managerial  Objec5ves  

Breaking  into  a  new  Market  

Reasons  for  Avoiding  Profit  Maximisa2on  

Many  business  are  profit-­‐seeking  but  not  always  profit  maximising  

•  Non-­‐profit  maximisa5on  means  moving  away  from  an  output  where  MC=MR  

•  Many  reasons  put  forward  including  increasing  market  share  at  the  expense  of  a  rival  by  cukng  a  firm’s  prices  

•  The  main  aim  of  a  business  could  be  long-­‐run  profit  maximisa2on  which  can  involve  sacrificing  some  of  the  short  run  profits  

SoZ  Drinks  –  The  Ba\le  for  Market  Share  

Market share of leading carbonated soft drink companies in the United States from 2004 to 2014

0.0%  

10.0%  

20.0%  

30.0%  

40.0%  

50.0%  

60.0%  

70.0%  

80.0%  

90.0%  

100.0%  

2004   2005   2006   2007   2008   2009   2010   2011   2012   2013   2014  

Market  sha

re    

Coca-­‐Cola   PepsiCo   Dr  Pepper  Snapple   Con   Na5onal  Beverage   Other*  

Coffee  Retail  Stores  in  the  UK  in  2013  

Leading 10 coffee shop chains ranked by number of outlets in UK in 2013

1,552  

760  

530  429  

315   304  

104   70   45   35  0  

200  

400  

600  

800  

1000  

1200  

1400  

1600  

1800  

Costa   Starbucks  Caffè  Nero   SSP*   Wild  Bean  Café  

M&S  Café   Coffee  Republic  

AMT  Coffee  

Muffin  Break  

Thorntons  Cafés  

Num

ber  o

f  outlets  

SSP  includes  the  opera5on  of  the  following  outlets:  Millie's,  Caffè  Ritazza,  Pumpkin  Café,  Camden  Food  Co,  Pastry  Shop,  Delice  de  France,  Soho  Coffee,  Starbucks,  Bread  boy,  Upper  Crust  

Discounters  such  as  Aldi  and  Lidl  are  on  the  march!  

Market share of grocery stores in UK from Feb 2013 to Feb 2014

0.0%  10.0%  20.0%  30.0%  40.0%  50.0%  60.0%  70.0%  80.0%  90.0%  100.0%  

Feb  2014  

Mar  2014*  

Apr  2014  

May  2014  

Jun  2014  

Jul  2014  

Aug  2014  

Oct  2014  

Nov  2014  

Dec  2014  

Jan  2015  

Feb  2015  

Percen

tage  sh

are  of  to

tal  grocers  

Grocers  

Other  Mul5ples   Farm  Foods   Iceland   Lidl  

Aldi   Waitrose   The  Coopera5ve   Morrisons  

Sainsbury's   Asda   Tesco  

The  fierce  ba\le  for  market  share  in  mobile  handsets  

Market share of handset manufacturers in UK in June 2014

31.8%  

22.9%  

16.9%  

6.7%   6.1%  3.7%  

2.4%   2.1%  

7.4%  

0.0%  

5.0%  

10.0%  

15.0%  

20.0%  

25.0%  

30.0%  

35.0%  

Samsung   Apple   Nokia   Sony   HTC   RIM   Motorola   LG   Other  

Market  sha

re  

Global  Market  Share  for  Car  Makers  in  2013  

Global market share of the world's largest automakers in 2013

12.3%  12%  11.9%  

9.3%  8.4%  

7.8%  6.3%  

5.3%  4.4%  

3.2%  3.4%  

2.8%  2.4%  2.4%  

8%  

0.0%   2.0%   4.0%   6.0%   8.0%   10.0%   12.0%   14.0%  

Toyota  General  Motors  

Volkswagen  Hyundai-­‐Kia  

Renault-­‐Nissan  Ford  

SAIC  Motor  Fiat-­‐Chrysler  

Honda  Suzuki  

Peugeot  Daimler  BMW  Chang  Other  

Market  share  

SAIC  Motor  Corpora5on  Limited  is  a  Chinese  state-­‐owned  automo5ve  manufacturing  company  headquartered  in  Shanghai,  China  

Revenue  Maximisa2on  

Maximising  Total  Revenue  

MC  

Price  and  Cost  

Output  

AC  

MR  

AR  

Profit  Max:  MC=MR  

Revenue  Max:  MR=0  

P1  

C1  

World’s  Biggest  Companies  By  Revenue  (2014)  100 largest companies in the world ranked by revenue in 2014 ($

476.86  476.29  468  

400.67  390.25  

373  270.61  

245.91  235.87  234.1  

216.57  211.77  

171.6  170.91  168.2  

0   100   200   300   400   500   600  

Royal  Dutch  Shell  Wal-­‐Mart  Stores  

Sinopec  BP  

Exxon  Mobil  PetroChina  Volkswagen  

Glencore  Xstrata  Total  

Toyota  Motor  Samsung  Electronics  

Chevron  Phillips  66  

Apple  E  On  

Revenue  in  billion  U.S.  dollars  

Sales  Maximisa2on  (AC=AR)  

When  a  business  sells  as  much  as  possible  without  making  a  loss  

MC  

Price  and  Cost  

Output  

AC  

MR  

AR  

Profit  Max:  MC=MR  

Sales  Max  at  output  where  AR=AC  At  this  output,  normal  profits  are  made  

P1  

Q1  

Building  a  base  of  installed  users  /  customers  

Number of worldwide active Amazon customer accounts:1997 to 2014

1.5   6.2   14   20   25  40  

76  88  

105  130  

164  

200  

237  

270  

0  

50  

100  

150  

200  

250  

300  

1997   1998  1999*  2000   2001   2003   2007   2008   2009   2010   2011   2012   2013   2014  

Num

ber  o

f  accou

nts  (in  m

illions)  

Sa2sficing  Pricing  Behaviour  

MC  

Price  and  Cost  

Output  

AC  

MR  

AR  

Possible  sa5sficing  price  

P1  

Q1   Q2  

P2  

C2  

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