an understanding of other objectives of firms: survival

Other Objectives of Firms: Survival

What is Survival?

Survival means a firm keeps running and does not go bankrupt. It must cover its total costs (fixed + variable) and stay afloat in the market. Think of a small café that must earn enough to pay rent, staff, and coffee beans each month. If it can’t, it will close its doors. 🚪

Why Survival Matters

• Market Stability: If many firms fail, the industry shrinks and jobs disappear. • Innovation Continuity: Surviving firms can invest in research and keep improving products. • Consumer Choice: More firms mean more options for shoppers. (Remember: survival is the foundation before any other goal!)

Survival Strategies (Analogy: A Boat in the Sea)

Imagine a small boat sailing in a vast sea. To survive, it must:

1. Keep its fuel level (cover variable costs).
2. Maintain its hull (cover fixed costs like rent).
3. Navigate to calmer waters (choose markets with lower competition).
4. Use efficient sails (cut unnecessary expenses).
5. Have a backup plan (diversify products or services).

Key Policies for Survival

Policy	Purpose	Example
Cost‑Control	Reduce variable costs to keep TR > TC.	Switch to cheaper suppliers.
Revenue Diversification	Spread risk across products.	A bakery adding a catering service.
Financial Reserves	Buffer against downturns.	Emergency cash fund.

Mathematics Snapshot

Survival requires that total revenue (TR) at least equals total cost (TC).

Formula: $TR \geq TC$

If $TR < TC$, the firm incurs a loss and may need to shut down in the short run.

Example:

• Fixed cost (FC) = £5,000
• Variable cost per unit (VC) = £10
• Price per unit (P) = £12
• Quantity sold (Q) = 600 units

$TR = P \times Q = 12 \times 600 = £7,200$ $TC = FC + VC \times Q = 5,000 + 10 \times 600 = £11,000$ Since £7,200 < £11,000, the firm is not surviving at this level of output. 🚨

Exam Tips (Box)

• Define survival: covering all costs to avoid bankruptcy. • Contrast with profit maximisation: profit = $TR - TC$, survival only needs $TR \geq TC$. • Use examples (e.g., small shop, startup) to illustrate. • Show mathematical condition ($TR \geq TC$) clearly. • Remember to discuss policies that help survival (cost control, diversification).

Sample Question: “Explain how a firm can use cost‑control to achieve survival.”
Answer: Outline the strategy, give an example, and show the inequality $TR \geq TC$.