IB Economics 2.4.3 Business Objectives Notes

Profit maximisation: the traditional objective

Definition

Rational Producer Behaviour

The act of aiming to maximise profits. The goal of firms, according to the standard theory of the firm.

Definition

Profit as factor payment

Payments, per unit time, made to the owners of entrepreneurship (one of the factors of production)

Note

Profits can also be understood as the difference between the total revenue and costs of a firm.

Profits can be understood as the difference between the total revenue and costs of a firm.

Hence, profit maximising firms try and maximise how much they earn while minimising how much they spend.

The idea that firms seek for profit maximisation is a key assumption in traditional economic models.

However, real-world firms often pursue other objectives.

Example

Profit maximisation in action

Suppose a firm produces 10,000 units of a product $X$ that

Costed $\$ 50,000$ in total.
Sold 9000 units for $\$ 10$ each.

Then the total revenue earned is

$$ 9000 \times \$ 10 = \$ 90000 $$

So the profit is

$$ Revenue - Cost = \$ 90000 - \$ 50000 = \$ 40000 $$

Alternative Business Objectives

Corporate social responsibility

Corporate social responsibility involves firms adopting ethical practices that benefit society as a whole, rather than focusing solely on profits. Firms may make business choices with their corporate social responsibility in mind due to:

Reputation and brand loyalty: a firm’s image, attracting socially conscious consumers.

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Note

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Tip

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In classical economics, firms are assumed to be profit maximisation seekers. However, firms may have alternative business objectives:

Corporate social responsibility.
Market share.
Satisficing.
Growth.

Exam technique

Self Review

Try to memorise case studies that can be applied to more than one concept!

Profit maximisation: the traditional objective

Definition

Rational Producer Behaviour

The act of aiming to maximise profits. The goal of firms, according to the standard theory of the firm.

Definition

Profit as factor payment

Payments, per unit time, made to the owners of entrepreneurship (one of the factors of production)

Note

Profits can also be understood as the difference between the total revenue and costs of a firm.

Profits can be understood as the difference between the total revenue and costs of a firm.
Hence, profit maximising firms try and maximise how much they earn while minimising how much they spend.
The idea that firms seek for profit maximisation is a key assumption in traditional economic models.
However, real-world firms often pursue other objectives.

Example

Profit maximisation in action

Suppose a firm produces 10,000 units of a product $X$ that

Costed $\$ 50,000$ in total.
Sold 9000 units for $\$ 10$ each.

Then the total revenue earned is

$$ 9000 \times \$ 10 = \$ 90000 $$

So the profit is

$$ Revenue - Cost = \$ 90000 - \$ 50000 = \$ 40000 $$

Alternative Business Objectives

Corporate social responsibility

Reputation and brand loyalty: a firm’s image, attracting socially conscious consumers.

IB Economics 2.4.3 Business Objectives Notes

IB Economics 2.4.3 Business Objectives Notes

Profit maximisation: the traditional objective

Profit maximisation in action

Alternative Business Objectives

Corporate social responsibility

anim nostrud sit dolore minim proident quis fugiat velit et eiusmod nulla quis nulla mollit dolor sunt culpa aliqua

Duis aute irure dolor in reprehenderit

Excepteur sint occaecat cupidatat non proident

Unlock the rest of this chapter with a free account

Profit maximisation: the traditional objective

Profit maximisation in action

Alternative Business Objectives

Corporate social responsibility

anim nostrud sit dolore minim proident quis fugiat velit et eiusmod nulla quis nulla mollit dolor sunt culpa aliqua

Duis aute irure dolor in reprehenderit

Excepteur sint occaecat cupidatat non proident

Unlock the rest of this chapter with a free account

IB Economics 2.4.3 Business Objectives Notes

1. Introduction to Economics2 subtopics

2. Microeconomics12 subtopics

3. Macroeconomics7 subtopics

4. The Global Economy10 subtopics

IB Economics 2.4.3 Business Objectives Notes

Profit maximisation: the traditional objective

Profit maximisation in action

Alternative Business Objectives

Corporate social responsibility

anim nostrud sit dolore minim proident quis fugiat velit et eiusmod nulla quis nulla mollit dolor sunt culpa aliqua

Duis aute irure dolor in reprehenderit

Excepteur sint occaecat cupidatat non proident

Unlock the rest of this chapter with a free account

Profit maximisation: the traditional objective

Profit maximisation in action

Alternative Business Objectives

Corporate social responsibility

anim nostrud sit dolore minim proident quis fugiat velit et eiusmod nulla quis nulla mollit dolor sunt culpa aliqua

Duis aute irure dolor in reprehenderit

Excepteur sint occaecat cupidatat non proident

Unlock the rest of this chapter with a free account

1. Introduction to Economics2 subtopics

2. Microeconomics12 subtopics

3. Macroeconomics7 subtopics

4. The Global Economy10 subtopics