Understanding Business Operations and Profit Maximization in Economics
When examining why firms continue operating despite losses, it's crucial to understand the economic principles behind short-run business decisions. The case of Blackberry's $4.4 billion loss in Q3 2013 provides an excellent example for studying these concepts in Price elasticity of demand A Level Economics.
In economics, firms may continue operating even when experiencing losses, provided they meet specific conditions. The primary consideration is whether average revenue AR exceeds average variable costs AVC. This fundamental principle helps explain why seemingly unprofitable businesses persist in the market.
Definition: Average Revenue AR represents the revenue per unit sold, while Average Variable Costs AVC are the variable costs per unit of output.
When a firm's average revenue surpasses its average variable costs, each unit sold contributes to covering fixed costs, even if the business isn't making an overall profit. This concept is particularly relevant for understanding market behavior and business sustainability in A Level Economics elasticity questions.
The relationship between revenue and costs becomes even more complex when considering different business objectives. For instance, when a firm shifts from profit maximization to sales maximization, it fundamentally changes its pricing strategy and output decisions.
Example: In Blackberry's case, if they moved from profit maximization to sales maximization, they would adjust their output from where marginal revenue equals marginal cost profitmaximization to where marginal revenue equals zero salesmaximization.