Business Objectives

What Business Objectives covers

Business objectives is examined in Unit A2 1, Business Economics. It covers why firms pursue maximum profit, alternative objectives: revenue, growth, managerial utility, satisficing and the environment, ownership, control and the principal-agent problem and stakeholders, and public versus private sector objectives.

The 4 subtopics

Each one has its own page.

• Why firms pursue maximum profitRetained profit an attractive source of finance for expansion, profit act as a signal in a market economy and threat of takeover push firms towards maximising profit.Open →
• Alternative objectives: revenue, growth, managerial utility, satisficing and the environmentMean for a firm to pursue sales revenue maximisation, managers want to maximise sales revenue rather than profit and mean for a firm to pursue sales volume maximisation.Open →
• Ownership, control and the principal-agent problemDivorce of ownership from control, principal-agent problem in the context of a company and asymmetric information central to the principal-agent problem.Open →
• Stakeholders, and public versus private sector objectivesDifference between a shareholder and a stakeholder, how employees can influence a firm's objectives and how customers can influence a firm's objectives.Open →

What you need to know

Answer each one before you reveal it.

Take Business Objectives further

The same content, four other ways.

Commonly confused

Pairs that lose marks when they are blurred together.

• Sales revenue maximisation vs Sales volume maximisation

  Sales revenue maximisation: producing where MR = 0, at the top of the total revenue curve. Sales volume maximisation: it pushes output beyond that point, into the inelastic region, limited only by the need to break even.

Questions from this topic

Each one with the model answer underneath.

1. 1

   Why is profit maximisation the standard assumption about what a firm is trying to do?

   Model answer

   Profit is the residual left for the owners after all costs are met, so maximising it maximises the return to those who bear the risk of the enterprise. It also gives a single, measurable objective that can be represented by a clear rule, namely producing where marginal revenue equals marginal cost. Firms that do not pursue it risk being outcompeted or taken over by those that do.

2. 2

   What output rule does a profit-maximising firm follow, and why does it work?

   Model answer

   The firm produces the output at which marginal revenue equals marginal cost, with marginal cost rising through marginal revenue. While an extra unit adds more to revenue than to cost it raises profit, so the firm should make it; once an extra unit adds more to cost than to revenue it lowers profit, so the firm should not. The turning point where the two are equal is therefore the profit maximum.

3. 3

   What three distinct reasons do the owners of a firm have for wanting profit to be as high as possible?

   Model answer

   Profit is the source of dividends, so higher profit raises the income shareholders receive from their investment. Retained profit is the cheapest source of finance for investment, since it avoids interest payments and the dilution of ownership that issuing new shares involves. Higher expected profit also raises the share price, so owners gain a capital gain as well as an income.

4. 4

   Why is retained profit an attractive source of finance for expansion?

   Model answer

   It carries no interest cost and no obligation to repay, so it does not raise the firm's gearing or its vulnerability to a rise in interest rates. It requires no new shares, so existing owners keep full control and their stake is not diluted. It is also immediately available without the delay, disclosure and fees involved in raising external finance.

5. 5

   How does profit act as a signal in a market economy?

   Model answer

   Supernormal profit indicates that consumers value the output of an industry more highly than the resources used to produce it are worth elsewhere, which attracts firms and resources into that industry. Losses indicate the reverse and drive resources out. Profit therefore performs a signalling and incentive function that guides the allocation of scarce resources without any central direction.

6. 6

   Why does the threat of takeover push firms towards maximising profit?

   Model answer

   If a firm earns less profit than its assets could yield, its share price falls below the value those assets would have under better management. That gap makes it an attractive target for a buyer who intends to raise profit and capture the difference. Managers who wish to keep their jobs therefore have an incentive to raise profit towards the maximum before someone else does it for them.

What is inside Levo

Six ways to work the same material.

Business Objectives revision questions

What does Business Objectives cover in CCEA A-Level Economics?

4 subtopics: why firms pursue maximum profit, alternative objectives: revenue, growth, managerial utility, satisficing and the environment, ownership, control and the principal-agent problem and stakeholders, and public versus private sector objectives. Each one has its own page with questions and model answers.

How is Business Objectives organised?

By the CCEA 4410 specification, subtopic by subtopic, so it matches the order you are taught it in.