Business Objectives and

PricingA2 Microeconomics

A Range of Business ObjectivesPure profit maximisation

Revenue maximisation

Increasing and protecting market share

Surviving a recession / slow recovery

Pursuing ethical business objectives

Always be aware of existence of different stakeholders

Managers and

Employees

Shareholders (Private

Equity or Stock Market)

Customers (Present and

Future)Government

Profit Maximisation

1. The condition for profit maximisation is that the firm produces where Marginal Cost (MC) equals Marginal Revenue (MR)

2. Producing less than this means the firm is missing out on revenue which is could gain.

3. Producing more than this means the extra production costs the firm more than it is receiving in revenue.

Rule for maximising profit

Price, Cost

Output (Q)

MC AC

MR

AR

Maximising profits – remember the rule!

Price, Cost

Output (Q)

MC AC

MR

AR

Output where MR=MC

P1

C1

Price, Cost

Output (Q)

MC AC

MR

AR

Supernormal profit when P>AC

P1

C1

Supernormal profit

Business environment impacts on pricing

Alternatives to profit maximisation

•When marginal revenue = zero

•This is at a higher output which maximises profits

Sales revenue maximisation

•The break-even output

•Enough profit to justify staying in market

•Output where AR = AC

Normal profits

•Constrained sales revenue maximisation

•Making enough profit to satisfy different demands of stakeholders

Satisficing

Price, Cost

Output (Q)

MC AC

MR

AR

Maximising revenue where MR = 0 ...means lower profit & lower prices

P1

C1

Q1

Price, Cost

Output (Q)

MC AC

MR

AR

Output (Q2) – where AC=AR - normal profits made and output is higher

P1

C1

Q1

P2

Q2

Satisficing

Social Enterprise

Recession

State Ownership

New Rivals

Government

Satisficing rather than Maximising

Satisficing = Satisfy + Suffice

Imperfect information among managers + complex markets

Managerial motives may differ from those of business owners

Can lead to rules of thumb approach to pricing

Social Enterprises – Increasingly Important in many countries

Business with broader social

objectives

Profits are reinvested for social projects

Social stakeholders – including the

local community

Wider aims than simply

driving shareholder / stock market

value

Not For Profit BusinessesNetwork Rail• Stated purpose is to deliver a safe, reliable and

efficient railway for Britain• Train operating companies pay them for track use• Profits are invested in the railway network• A state-owned business (formerly called Railtrack)

Charities• Revenue objectives – affects pricing decisions• Charitable status / social objectives• Many charities are businesses limited by degree –

this gives them legal protection

Evaluation PointsBusiness pricing affects economic efficiency• High prices – loss of allocative efficiency• High profits – opportunity to reinvest and innovate

Business strategies affect consumer welfare • Consumer surplus from market activity• Affordability for consumers with different incomes

Most businesses are profit seeking but are not profit-maximizers – they satisfice

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