1. Businesses have a range of objectives beyond pure profit maximization, including revenue maximization, market share protection, and ethical goals. 2. Pricing decisions must balance the interests of different stakeholders like shareholders, managers, customers, employees, and the government. 3. For profit maximization, firms should produce where marginal cost equals marginal revenue. Producing more costs more than it earns, while producing less misses potential revenue.

1. Business
Objectives and
Pricing
A2 Microeconomics

2. A Range of Business Objectives
Pure profit maximisation
Revenue maximisation
Increasing and protecting market share
Surviving a recession / slow recovery
Pursuing ethical business objectives

3. Always be aware of existence of
different stakeholders
Shareholders
Managers Customers
(Private
and (Present and Government
Equity or
Employees Future)
Stock Market)

4. Profit
Maximisation

5. Rule for maximising profit
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.

6. Maximising profits – remember
the rule!
Price, Cost
MC AC
AR
MR
Output (Q)

7. Output where MR=MC
Price, Cost
MC AC
P1
C1
AR
MR
Output (Q)

8. Supernormal profit when P>AC
Price, Cost Supernormal profit
MC AC
P1
C1
AR
MR
Output (Q)

9. Business environment impacts on pricing

10. Alternatives to profit maximisation
• When marginal revenue = zero
Sales revenue
• This is at a higher output which
maximisation maximises profits
• The break-even output
Normal profits • Enough profit to justify staying in market
• Output where AR = AC
• Constrained sales revenue maximisation
Satisficing • Making enough profit to satisfy different
demands of stakeholders

11. Maximising revenue where MR = 0
...means lower profit & lower prices
Price, Cost
MC AC
P1
C1
AR
Q1 Output (Q)
MR

12. Output (Q2) – where AC=AR - normal
profits made and output is higher
Price, Cost
MC AC
P1
P2
C1
AR
Q2 Output (Q)
Q1
MR

13. Satisficing
Social
Government
Enterprise
New Rivals Recession
State
Ownership

14. 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

15. Social Enterprises – Increasingly
Important in many countries
Wider aims
Social
than simply
Business with Profits are stakeholders –
driving
broader social reinvested for including the
shareholder /
objectives social projects local
stock market
community
value

16. Not For Profit Businesses
Network 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

17. Evaluation Points
Business 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

18. Tutor2u
Keep up-to-date with economics,
resources, quizzes and
worksheets for your economics
course.