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Outline the main reasons why most companies pursue profit maximisation as their main business objective and explain how the following concepts can influence its achievementa) Price elasticity of demand (b) Income elasticity of demand (c) Labour productivi

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Introduction

1) Outline the main reasons why most companies pursue profit maximisation as their main business objective and explain how the following concepts can influence its achievement: (a) Price elasticity of demand (b) Income elasticity of demand (c) Labour productivity Profit is essential to all companies and this report will look at why they are needed and how they are affected by external and internal factors. This report will focus on four main topics. The first being profit maximisation. In this section this report will examine what profit is, what it is used for and how a company can maximise it. The second segment of the report will focus on price elasticity of demand. After reading this section it will be clear what price elasticity of demand is, how it affects products, how it effects total revenue and profit and what a company can do to use price elasticity of demand to maximise profits. The next section centres on income elasticity of demand. In this section it will be discussed what income elasticity of demand is, what products its effects and how, how it effects profits and how a company can use income elasticity to maximise profits. The final stage of the report will concentrate on labour productivity, what labour productivity is, how it affects profits and how a company can increase labour productive to maximise profits. We will now examine why profit maximisation is a crucial business objective. Profits can be defined as total revenue from sales minus total production costs, or Profit (?) ...read more.

Middle

There are three main factors, as identified by Thomas, C.R. and Charles Maurice, S. (2005, p215). The first being 'Availability of substitutes' "The better the substitutes for a given product or service the more elastic the demand for that good or service. When the price of a good rises, consumers will substantially reduce consumption if they perceive that close substitutes are readily available (e.g. fruit of life insurance). Naturally, consumers will be less responsive to a price increase if they perceive that only poor substitutes a re available (e.g. petrol or tobacco)" The second factor that affects price elasticity of demand is 'Percentage of consumer's budget'. Thomas, C.R. and Charles Maurice, S. (2005, p215) recorded: "...we would expect the price elasticity to be directly related to the percentage of consumers' budgets spent on the good. For example the demand for refrigerators is probably more price elastic than the demand for toasters because the expenditure required to purchase a refrigerator would make up a larger percentage of the budget of a "typical" consumer." So the larger percentage of a consumers budget the more price elastic the product is. The final factor is time period of adjustment. When a price is first increased consumers will recognise the increase ant try to buy alternative products. Over time they may revert back to the old product, forgetting the price increase. If they cannot buy an alternative product they will keep purchasing the product but keep looking for a substitute (Thomas, C.R. ...read more.

Conclusion

Profit maximisation is affected by price elasticity of demand, in that the identification of whether a product is price inelastic or price elastic is very important, as prices changes have very different effects depending in which category a companies product or service falls into. For a company to maximise profit it needs to, identify if a product is price elastic or price inelastic. If the product is price inelastic the company can raise the price, as people will still buy it, to increase revenue and profits. If the product is price inelastic the company should reduce its price as, allot more people will buy it, to increase revenue and profits. Income elasticity of demand also effects profit maximisation. If a product has high income elasticity of demand, over time the demand for it will increase but if a product has a low income elasticity of demand, demand over time will remain stable, even during recessions. Labour productivity affects profit maximisation because if a companies labour force is not working to its full productivity rate this increases the company's costs, therefore decreasing profit. For that reason to maximise profits a company needs to make their labour force as productive as possible by increasing physical capital through providing the best tools for the workforce, increasing human capital through providing training and increasing technology by making sure all equipment used within the company is technological advanced. This will reduce costs and therefore increase profits. If a company examines these factors carefully it will maximise profits, achieve its main objective, and therefore insure its survival, growth and development within a competitive market for an extended stretch of time. . ...read more.

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