Welcome to the World of Business Goals!
In this chapter, we are going to look at what makes firms (businesses) "tick." If you’ve ever wondered why some shops have massive sales while others keep their prices high, or why a new tech company might lose money for years but still keep growing, you are in the right place! We are exploring the objectives of firms—which is just a fancy way of saying "what businesses are trying to achieve."
Understanding these goals is important because a firm’s objective acts like a steering wheel; it decides which direction the business moves, how it sets its prices, and how it treats its competitors.
1. The Big One: Profit Maximisation
For most firms, the primary goal is to make as much profit as possible. In Economics, we define profit using a simple formula:
\( \text{Profit} = \text{Total Revenue (TR)} - \text{Total Costs (TC)} \)
Total Revenue is all the money the firm gets from selling its goods. Total Costs are everything they had to pay out (wages, rent, electricity) to make those goods.
Analogy: Imagine you are selling cupcakes at a school fair. If you spend \$10 on ingredients (Total Cost) and sell all your cupcakes for \$25 (Total Revenue), your profit is \$15. To "maximise" profit, you’d want that \$15 to be the biggest number possible!
Why do firms want profit?
- Survival: You can't stay in business if you keep losing money.
- Rewards: Profit is the reward for the owners (entrepreneurs) taking a risk.
- Investment: Profit can be used to buy better machines or open new shops.
Quick Review: The Profit Formula
Total Revenue = Price \(\times\) Quantity Sold
Profit = Total Revenue \(-\) Total Costs
2. Other Important Objectives
Don’t worry if you thought profit was the *only* goal! In the real world, firms often have other targets, especially in the short term. Here are the main ones you need to know for your exam:
A. Survival
Sometimes, a firm just wants to stay alive. This usually happens when the economy is in a "recession" (a bad time) or if a new competitor suddenly opens next door. During these times, a firm might lower its prices just enough to cover its costs, even if it makes zero profit.
Real-world example: During the COVID-19 lockdowns, many restaurants switched their objective to survival. They weren't trying to get rich; they were just trying to pay their rent and keep their staff employed until things returned to normal.
B. Growth
Some firms focus on getting bigger. This could mean opening more branches, hiring more people, or producing more products. Owners might choose growth over immediate profit because being bigger often leads to "economies of scale" (where it becomes cheaper to produce each item as you make more of them).
C. Increasing Market Share
Market share is the percentage of total sales in a market that one firm has. If 100 people buy smartphones and 60 of them buy an iPhone, Apple has a 60% market share.
Firms often try to increase their market share to push out competitors. They might do this by:
- Heavy advertising.
- Selling products at a very low price (sometimes even at a loss!) to attract customers away from rivals.
Memory Aid: P.G.S.M.
To remember the four main objectives, think: Please Give Some Money.
Profit, Growth, Survival, Market Share.
3. How Objectives Affect Behaviour
The objective a firm chooses will change how it acts in the market. This is a key point for your Oxford AQA exams!
If a firm wants Profit Maximisation: It will be very careful with costs and might set higher prices to get more "margin" on each sale.
If a firm wants Market Share: It will likely set lower prices and spend a lot of money on marketing to get people through the door.
Did you know? Some firms have "Social Objectives" too! These are non-profit goals, like reducing plastic waste or donating a portion of sales to charity. While profit is still important, these firms believe that being "good" will actually attract more customers in the long run.
4. Common Mistakes to Avoid
Mistake 1: Confusing Revenue with Profit.
Remember, a firm can have millions of dollars in Revenue (money coming in) but still make a Loss if their Costs are even higher. Always subtract costs to find the profit!
Mistake 2: Thinking objectives never change.
A firm might start with a Survival objective in Year 1, move to Growth in Year 3, and finally focus on Profit Maximisation in Year 10. Objectives are flexible!
Summary Takeaways
- Profit Maximisation is the "default" goal for most firms (\(TR - TC\)).
- Survival is the priority during tough economic times or high competition.
- Growth and Market Share are about long-term dominance and getting bigger.
- Behaviour: A firm's goals determine its prices and how it competes with others.
Don't worry if this seems a bit abstract at first! Just remember that behind every shop and brand you see, there is a manager making a choice about what is most important to them right now.