S121 ECO504 BUSINESS ECONOMICS

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Business Goals and Behavior

PART 4

THE ECONOMICS OF FIRMS

IN MARKETS

Types of Goods • Excludable means a

person can be prevented

from using it when they do

not pay for it

• Rival – the property of a

good whereby one

person’s use diminishes

other people’s use

• Private goods – goods that

are both excludable and

rival

• Public goods are neither

excludable nor rival

• Common resources are

rival but not excludable

Aims & Objectives

 Aims are the long-term goals of a business

 Objectives are the means by which a business will

be able to achieve its aims

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Strategies & Tactics

 Strategy = actions, decisions and obligations which

lead to the firm gaining a competitive advantage

and exploiting the firm’s core competencies

 Tactic = short-term framework for decision making

Public Sector Versus Private Sector

 Public sector is where business activity is owned,

financed and controlled by the government

• Street lighting

• Justice

• Police

 The private sector is where business is owned,

financed and run by private individuals

 Merit goods are also provided by the public sector

because market provision would not lead to an optimal

production

• Health care

• Education

Profit Maximization

Information the firm needs:

 Average revenue is the total revenue divided by

the amount sold

 Marginal revenue is the change in total revenue

from the sale of each additional unit of output.

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Total, Average and Marginal

Revenue for Waterlane Farm Dairy,

a Competitive Firm. Quantity Price (€) Total revenue Average revenue Marginal revenue

1 0.35 0.35 0.35 0.35

2 0.35 0.7 0.35 0.35

3 0.35 1.05 0.35 0.35

4 0.35 1.4 0.35 0.35

5 0.35 1.75 0.35 0.35

6 0.35 2.1 0.35 0.35

7 0.35 2.45 0.35 0.35

8 0.35 2.8 0.35 0.35

Opportunity Cost

 Accounting Costs

• The explicit costs of the resources needed to

produce goods or services.

• Reported on the firm’s income statement.

 Opportunity Cost

• The cost of the explicit and implicit resources that

are foregone when a decision is made.

 Economic Profits

• Total revenue minus total opportunity cost.

Marginal Cost

 The marginal cost is the change in total costs from

the production of each additional unit

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Costs

€0.35

Quantity of Output

1 2 3 4 5 6 7 8 9 10

MC

Identifying the Point of Profit

Maximization

MR

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Cost Minimization

 Product life cycle from launch through to growth,

maturity and decline

• Sales might slow but equipment still in use might have

depreciated to zero

• Firms can look at making other costs savings

 Productivity = Total Output divided by units of a factor

 Look at reducing costs in the supply chain

» More efficient distribution

Shareholder Value

 Increase in the share price of the business

 Increase the value of the dividends paid to

shareholders

 Free cash flow the cash generated from the firm’s

operations minus that spent on capital assets

Summary of Financial Goals

1. Profit maximization

2. Revenue maximization

3. Cost minimization

4. Shareholder value