A2 Micro: Business Objec2ves

Transcription

1 A2 Micro: Business Objec2ves A short revision webinar covering profit maximisa5on, changes in costs and revenues and pricing with different business objec5ves

2 Revising A2 Economics (Micro) Build lots of real world examples into your notes Common industries used include food retailers, u2li2es, banks, airlines, technology sectors

3 Business Objec2ves Profits Share price Revenue Managerial Aims Growth Aims Cash Flow Market Power Survival Social Aims Reputa5on

4 Profits and Profit Maximisa2on

5 The Importance of Profit Profit is an important objec5ve of most firms 1. Finance for investment: Retained profits are source of finance for companies undertaking investment 2. Market entry: Rising profits send signals to other producers within a market 3. Demand for factor resources: Resources flow where the expected rate of return or profit is highest 4. Signals about the health of the economy: Rising profits might reflect improvements in supply- side performance. Strong profits are also the result of high levels of demand.

6 High Rates of Return in Pharmaceu2cals Profit margin of top 10 global pharmaceutical companies in % 45.0% 43% 40.0% 35.0% Profit margin 30.0% 25.0% 20.0% 15.0% 10.0% 24% 22% 21% 20% 19% 16% 11% 10% 10% 5.0% 0.0% Pfizer (U.S.) Roche (CH) AbbVie (U.S.) GSK (UK) Eli LillyEli Johnson & Lilly (U.S.) Johnson (U.S.) Novartis (CH) Sanofi (France) Astra Zeneca (UK) Merck (U.S.)

7 Research Spending in Pharmaceu2cals Top global pharmaceutical companies by prescription sales and R&D spending in 2013 (in billion U.S. dollars) Research and development spending Prescrip5on sales Sales/spending in billion U.S. dollars Novar5s (Switzerland) Pfizer (U.S.) Roche (Switzerland) Sanofi- Aven5s (France) Merck (U.S.) GlaxoSmithKline (UK) Johnson & Johnson (USA) AstraZeneca (UK) Eli Lilly (U.S.) Abbvie (U.S.) Amgen (U.S.) Teva (Israel) Bayer (Germany) Novo Nordisk (Denmark)

8 The Concept of Marginal Profit Marginal profit is the increase in profit when one more unit is sold Cost MC Marginal profit is posi5ve Marginal profit is nega5ve MR Output

9 Profit Maximisa2on Total profit is maximised when marginal revenue = marginal cost Cost MC AC AR MR (MR=MC) Q1 Output

10 Profit Maximising Price and Total Profit P1 is the profit maximising price; total profit = (P1 C1) Q1 Cost MC AC P1 C1 AR MR (MR=MC) Profit Q1 Output

11 Economic Losses (Sub Normal Profit) Cost and Price C1 MC AC P1 MR AR Q1 Output

12 Shut Down Price in the Short Run Cost and Price C1 MC AC AVC P1 MR AR Q1 Output

13 Shut Down Price in the Short Run Cost, Price P1 P1: Price = average cost, normal profits made The Shut- Down price is mainly a short run concept MC AC AVC P2 P2: Price = average variable cost P=Min AVC is the shut down price for a compe55ve firm in short run Quantity of output

14 Prices and Profits with Economies of Scale Economies of scale lead to higher supernormal profits Cost & Price Internal Economies of Scale shown by the drop in average and marginal cost from MC1 and AC1 to MC2 and AC2 The profit maximising price when costs are high is P1 and Q1 P1 MC1 AC1 When internal economies of scale are achieved, the profit- maximising price falls to P2 and output expands to Q2 P2 C2 MC2 AC2 AR Economies of scale mean lower prices for consumers And higher profits for producers MR Supernormal profit at price P2 Q1 Q2 Output (Q)

15 Different Business Objec2ves Profit Maximisa5on Sales Revenue Maximisa5on Business Growth / Market Power Business Survival Not For Profit Social Enterprises State- Owned Businesses

16 Reasons for Avoiding Profit Maximisa2on Many business are profit- seeking but not always profit maximising Non- profit maximisa5on means moving away from an output where MC=MR Many reasons put forward including increasing market share at the expense of a rival by cukng a firm s prices The main aim of a business could be long- run profit maximisa2on which can involve sacrificing some of the short run profits Protec5ng an exis5ng Market Posi5on Managerial Objec5ves Business survival in hard 5mes Breaking into a new Market

17 SoZ Drinks The Ba\le for Market Share Market share of leading carbonated soft drink companies in the United States from 2004 to 2014 Market share Coca- Cola PepsiCo Dr Pepper Snapple Con Na5onal Beverage Other* 100.0% 90.0% 80.0% 70.0% 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0%

18 Coffee Retail Stores in the UK in 2013 Leading 10 coffee shop chains ranked by number of outlets in UK in 2013 Number of outlets , SSP includes the opera5on of the following outlets: Millie's, Caffè Ritazza, Pumpkin Café, Camden Food Co, Pastry Shop, Delice de France, Soho Coffee, Starbucks, Bread boy, Upper Crust Costa Starbucks Caffè Nero SSP* Wild Bean Café M&S Café Coffee Republic AMT Coffee Muffin Break Thorntons Cafés

19 Discounters such as Aldi and Lidl are on the march! Market share of grocery stores in UK from Feb 2013 to Feb 2014 Other Mul5ples Farm Foods Iceland Lidl Aldi Waitrose The Coopera5ve Morrisons Sainsbury's Asda Tesco Percentage share of total grocers 100.0% 90.0% 80.0% 70.0% 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% Feb 2014 Mar 2014* Apr 2014 May 2014 Jun 2014 Jul 2014 Aug 2014 Oct 2014 Nov 2014 Dec 2014 Jan 2015 Feb 2015 Grocers

20 The fierce ba\le for market share in mobile handsets Market share of handset manufacturers in UK in June % 31.8% 30.0% 25.0% 22.9% Market share 20.0% 15.0% 16.9% 10.0% 5.0% 6.7% 6.1% 3.7% 2.4% 2.1% 7.4% 0.0% Samsung Apple Nokia Sony HTC RIM Motorola LG Other

21 Global Market Share for Car Makers in 2013 Global market share of the world's largest automakers in 2013 Market share 0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% 14.0% Toyota General Motors Volkswagen Hyundai- Kia Renault- Nissan Ford SAIC Motor Fiat- Chrysler Honda Suzuki Peugeot Daimler BMW Chang Other 3.2% 3.4% 2.8% 2.4% 2.4% 5.3% 4.4% 6.3% 9.3% 8.4% 7.8% 8% 12.3% 12% 11.9% SAIC Motor Corpora5on Limited is a Chinese state- owned automo5ve manufacturing company headquartered in Shanghai, China

22 Revenue Maximisa2on

23 Maximising Total Revenue Price and Cost Revenue Max: MR=0 MC P1 AC C1 AR Profit Max: MC=MR MR Output

24 World s Biggest Companies By Revenue (2014) 100 largest companies in the world ranked by revenue in 2014 ($ Revenue in billion U.S. dollars Royal Dutch Shell Wal- Mart Stores Sinopec BP Exxon Mobil PetroChina Volkswagen Glencore Xstrata Total Toyota Motor Samsung Electronics Chevron Phillips 66 Apple E On

25 Sales Maximisa2on (AC=AR) When a business sells as much as possible without making a loss Price and Cost Sales Max at output where AR=AC At this output, normal profits are made MC AC P1 AR Profit Max: MC=MR MR Q1 Output

26 Building a base of installed users / customers Number of worldwide active Amazon customer accounts:1997 to 2014 Number of accounts (in millions) *

27 Sa2sficing Pricing Behaviour Price and Cost Possible sa5sficing price MC P1 P2 AC C2 AR Q1 Q2 Output MR

28 Get help from fellow students, teachers and tutor2u @economicsuk