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Business objectives (HL only)

Introduction

The focus of this lesson is the various objectives of any business.  It is generally assumed in economics that private sector businesses operate primarily for profit while those in the public sector operate primarily as a public service.  While this is often the case there are other business objectives that a business may prioritise or at least consider in their day to actions actions. 

Enquiry question

What are the reasons why businesses set up?  Is it only about making a profit or are their other goals - revenue maximisation, growth maximisation, satisficing and corporate social responsibility.

Teacher notes

Lesson time: 40 minutes

Lesson objectives:

Explain alternative goals of firms, including revenue maximisation, growth maximisation, satisficing and corporate social responsibility.

Teacher notes:

1. Beginning activity - begin with the opening question and allow 5 minutes for discussion.

2. Processes - technical Vocabulary - the students can learn the key concepts through the handout which should take 15 minutes to go through and discuss. (10 minutes)

3. Practise activities - included in the handout. (15 minutes)

4. Reflective activity - a section A, paper one style question, is included on the page.  (10 minutes)

Beginning activity

Identify the primary motive for each of the entrepreneurs in the following examples:

A new business start up in a competitive field where many new businesses fail

An established business that is a leader in its field

A business set up to reunite fathers with their children

A wealthy Russian oil tycoon purchases a successful Premiership football club.

A new business start up in a competitive field where many new businesses fail - survival

An established business that is a leader in its field - maximising profit levels

A business set up to reunite fathers with their children - to provide a service

A wealthy Russian oil tycoon purchases a successful Premiership football club - self promotion / personal satisfaction.

Key terms:

Motives of businesses - maximising profit

Survival - Initially some new businesses aim just to survive for the first year or so before pursuing more loftier aims only once they have been established

Promote a particular cause - e.g charities such as Cancer Relief, WWF and Greenpeace

Self actualisation - to satisfy the owners particular interests or need for fame

Profit satisficing - make satisfactory profits for the owners, without taking unnecessary risks

Sales / revenue growth - maximising revenue (TR) or sales, rather than profit

Corporate social responsibility (CSR) - a self-regulating business model that helps a company be socially accountable — to itself, its stakeholders, and the public.

The activities on this page are included as a PDF file at: Motives of businesses

Activity 1: Research question on the motives of different business

Why might certain businesses choose to remain not for profit businesses?

Remaining a not for profit organisation surprisingly does have some advantages, for example:

Organisations that qualify as public charities do not have to pay corporate income tax - though employees are still liable to pay income tax.

Non-profit businesses can ask the public for donations as well as apply for government grants, not available to profit making firms.

However, there is one clear disadvantage which is obvious

The owner is unable to get rich from their business.

Activity 2: A focus on the pharmaceutical industry

Watch the two short videos, focused on the pharmaceutical industry and then complete the work points that follows:

First a positive view of the drug industry.

And now for the alternative view:

1. Do businesses in the pharmaceutical industry have an obligation to anybody except their shareholders?

Legally of course no, but morally very likely?

2. Draw a demand and supply curve for medicines and use this to explain why drug companies, in unregulated markets will always be incentivised to raise their prices.

The market for drugs can be characterised by an elastic PES, like most manufactured products and highly inelastic PED - particularly for essential medicines.

This means that inevitably when a pharmaceutical firm raises its prices, e.g. from P1 to P2 in the diagram then the % fall in demand will be smaller than proportional (Q1 to Q2), meaning that the business will see an increase in its revenue from P1 x Q1 to P2 x Q2.

Unless the market is regulated as in many nations, but not interestingly America where the second video was filmed.

3. The table highlights the price of medicines in a range of comparable OEDC nations:

NationAnnual pharmaceutical spending per capita $
USA1,011
Germany686
Canada669
France553
UK497
Australia427
Netherlands417
Norway401
Sweden351

Provide an explanation for the sharp differences between the price of drugs in different OECD nations?

Predictably the USA heads the list of the most spent on medicines and there are probably two reasons for this. Firstly, the USA unlike the other nations on the list does not have a public subsidised medical programme.  This makes it easier for drug companies to force up the prices of essential drugs, in their dealings with individual companies.

By contrast, dealing with huge public funded health services is more difficult.  When trying to sell medical products in the UK, for example, there is only principally one customer - the NHS.  As the only purchaser it is they who hold the dominant position in the market, allowing them to force down prices.

The second video may also provide a clue - perhaps patients in the USA are simply easier to convince that the medicine they are taking is essential, making them prepared to pay more for it?

Further reading on this topic can be downloaded at:  USA drug prices

Activity 3: Link to the assessment

Examples of a paper one question on this topic include:

Part (a)

Explain why some firms may choose to pursue different objectives than the pursuit of profit maximisation.  [10 marks]

Command term: Explain, meaning provide reasons why an entrepreneur may choose other priorities than maximising profits.

Key term to define: profit

Reasons might include:

  • A new business start up e.g. a cafe opening up in an area with many other similar established businesses will probably looking simply to survive initially.  This example might also be relevant for a business launching a new product or diversifying into a new region. 
  • A business set up as a charity will have the priority of promoting a cause or service.  Legally such businesses cannot even make a profit, with any surplus required to be ploughed back into the business
  • A wealthy Russian or Qatar tycoon purchasing a successful Premiership football club will not expect to earn profits from their acquisition.  Instead their motivation might be self promotion / personal satisfaction
  • Public sector services e.g. public transport, health services e.t.c
  • A business looking to grow quickly will choose revenue maximisation over profit maximisation as their primary goal
  • A business where the managers controlling the business do not have a financial stake in the business and are likely to plot a course of lower risk and lower potential returns, called self satisficing as their primary goal.