business objectives and pricing
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Business Objectives and
PricingA2 Microeconomics
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A Range of Business ObjectivesPure profit maximisation
Revenue maximisation
Increasing and protecting market share
Surviving a recession / slow recovery
Pursuing ethical business objectives
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Always be aware of existence of different stakeholders
Managers and
Employees
Shareholders (Private
Equity or Stock Market)
Customers (Present and
Future)Government
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Profit Maximisation
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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
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Price, Cost
Output (Q)
MC AC
MR
AR
Maximising profits – remember the rule!
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Price, Cost
Output (Q)
MC AC
MR
AR
Output where MR=MC
P1
C1
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Price, Cost
Output (Q)
MC AC
MR
AR
Supernormal profit when P>AC
P1
C1
Supernormal profit
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Business environment impacts on pricing
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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
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Price, Cost
Output (Q)
MC AC
MR
AR
Maximising revenue where MR = 0 ...means lower profit & lower prices
P1
C1
Q1
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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
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Satisficing
Social Enterprise
Recession
State Ownership
New Rivals
Government
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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
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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
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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
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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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