Objective of Businesses

This article describes the main objective of businesses – generating revenue and making profit. It describes different types of revenue such as the concepts o Total Revenue (TR), Average Revenue (AR) and Marginal Revenue (MR).

It also explains the difference between Normal Profit and Abnormal Profit.

Finally, this post describes the idea of profit maximization by explaining the profit maximizing position where Marginal Cost (MC) equals to Marginal Revenue (MR).

Revenue

The overall objective of firms is to make profit. Without profit they would be unable to survive and would close down. Revenue is a measure of a company’s total sales in the market. As long as a company can control costs and efficiency, revenue will be higher than costs allowing them to make profit. Total, average and marginal cost can be used to assess the health and efficiency of a company; so too can total, average and marginal revenue.

1. Total Revenue (TR). Total Revenue (TR) is the actual amount of income received at a given level of output. It is calculated using the following formula:

Total Revenue (TR) = Quantity Sold (Q) * Price (P)

2. Average Revenue (AR). Average Revenue (AR) is revenue per unit sold (often the same as the selling price). It is calculated using the following formula:

Average Revenue (AR) = Total Revenue (TR) / Quantity Sold (Q)

3. Marginal Revenue (MR). Marginal Revenue (MR) is what is earned by selling an extra one unit of output. It is calculated using the following formula:

Marginal Revenue (MR) = Change in Total Revenue (∆TR) / Change in Quantity Sold (∆Q)

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Profit

In Economics, there are two types of profit such as Normal Profits and Abnormal Profits (sometimes also called Supernormal Profits).

A. Normal Profit. Normal Profit is measured by the benefits that could be gained, if resources were used for another use. In other words, it is the opportunity cost of production. For example, A person who could earn USD10,000 per month, if their resources are used to work for another firm. Therefore, we could assume they will expect to make at least USD15,000 instead of USD

Marginal Cost (MC)
in USD135– 2513142510516–258725259947– $22

Even though the addition to total profit is zero, it is important to remember that Normal Profit is included as a cost.

In summary, he main objective of businesses is to generate revenue and minimize costs aiming for profit maximization. Profit maximization is when Marginal Cost (MC) equals to Marginal Revenue (MR). Normal profit is included as a cost, so even though the last unit may add nothing to profit the firm still produces this unit.