1) Objectives of firms (1)

Question 1

firm definition

Answer 1

an organisation that brings together factors of production in order to produce output

Question 2

normal profit definition

Answer 2

the return needed for a firm to stay in the market in the long run

Question 3

supernormal (abnormal or economic) profits definition

Answer 3

profits above normal profits

Question 4

profit definition

Answer 4

total revenue minus total cost; TR-TC

Question 5

profit maximisation definition

Answer 5

MC=MR

• increasing Revenue through an extra sale - lower prices

Question 6

sales revenue maximisation definition

Answer 6

MR=0

Question 7

sales volume maximisation definition

Answer 7

AC=AR

Question 8

Notes: traditional theory of the firm assumes that firms are aiming to maximise

Answer 8

profit

Question 9

notes

where/when does profit maximisation occur?

Answer 9

Profit maximisation occurs where MC=MR; more output is produced and sold until the extra cost incurred by one more unit of production exactly equals the revenue gained from that unit of production

Question 10

notes

how does profit maximisation work?

Answer 10

Because we assume unit costs to fall, then rise, with output, and revenue per unit assumed to fall with output, there will be an optimum point at which to cease extra production and maximise profit

Question 11

Profit maximisation is often a … run objective

Answer 11

long

Question 12

notes

Profit maximisation is often a long run objective
Other objectives could be …run objectives

Question 13

notes

what may a firm do in the short run to maximise profit in the long run

Answer 13

A firm may sacrifice profit in the short run to maximise profit in the long run

Question 14

notes

• A firm may sacrifice profit in the short run to maximise profit in the long run by: (list 3 points)

Answer 14

• Maximise sales revenue by producing where MR = 0.

o Maximise sales volume by producing where AR = AC.

o Maximising growth by increasing market share and the size of the firm.

Question 15

notes

• A firm may sacrifice profit in the short run to maximise profit in the long run by: maximising sales revenue, explain

Answer 15

1) Maximise sales revenue by producing where MR = 0. Production is increased to a point where additional sales would reduce overall revenue because to make an extra sale the price of all such goods would have to be reduced.

Question 16

notes

• A firm may sacrifice profit in the short run to maximise profit in the long run by: maximising sales volume, explain

Answer 16

Maximise sales volume by producing where AR = AC. This is the highest level of sales that a firm can sustain in the long run; a higher level of sales would see AR<AC and the firm would make a loss.

Question 17

notes

• A firm may sacrifice profit in the short run to maximise profit in the long run by: maximising growth, explain

Answer 17

Maximising growth by increasing market share and the size of the firm. Cutting prices below cost will lead to a loss in the short run, but may lead to even higher long run profits. This is due to increased brand recognition or an ability to cut costs due to increased scale of operation (economies of scale).

Question 18

notes

why may a firm try to maximise sales or revenue in the short run

Answer 18

1) to increase its market share or to gain market power so that it can make monopoly profits in the long run

2) higher sales make it easier to borrow money

3) achieving these short run objectives could help to maximise profits in the long run

Question 19

analysis
what is the conventional theory of a firm?

Answer 19

Conventional theory of the firm assumes that businesses set a price that maximises their total profits, and have enough information, market power and motivation to. By default, we assume that firms will profit maximise, and stay in the market if they are making supernormal profit.

Question 20

Evaluation

what are profit maximisation’s realistic assumptions? state points

Answer 20

1) information
2) single-product businesses (A business may only make a single product)

Question 21

Evaluation

how is information a realistic assumption of Profit maximisation?

Answer 21

Businesses know their costs and revenue based on market experience, so are best placed to calculate where MC=MR

Question 22

Evaluation

what are profit maximisation’s unrealistic assumptions? state points

Answer 22

1) Imperfect information
2) Multi-product businesses
3) Ignores time

Question 23

Evaluation

how is imperfect information an unrealistic assumption of Profit maximisation?

Answer 23

• It’s hard for a business to pinpoint their precise profit maximising output, as they cannot accurately calculate marginal revenue and marginal cost

• Day-to-day pricing decisions are taken on the basis of “estimated demand”

Question 24

Evaluation

how are multi-product businesses an unrealistic assumption of Profit maximisation?

Answer 24

Most businesses are multi-product firms operating in a range of markets across countries and continents - the sheer volume of information that they have to handle is vast. And they must keep track of the ever-changing preferences of consumers.

Question 25

Evaluation

how is ignoring time an unrealistic assumption of Profit maximisation?

Answer 25

To maximise profits in the long run may, in the short run, require not producing at MC=MR to capture market share and raise prices to increase profits later

Question 26

Evaluation

what are the 3 advantages/disadvantages of objectives of firms?

Answer 26

1) Sales revenue maximisation
2) Sales volume maximisation
3) Growth maximisation

Question 27

evaluation

how is sales revenue maximisation an advantage?

Answer 27

• Faster growth than profit maximisation
  • Larger firms gain easier access to finance

Question 28

evaluation

how is sales volume maximisation an advantage?

Answer 28

Faster growth than sales revenue maximisation

Question 29

evaluation

how is growth maximisation an advantage?

Answer 29

Faster growth than sales volume maximisation

Question 30

evaluation

how is sales revenue maximisation a disadvantage?

Answer 30

Lower profits than profit maximisation

Question 31

evaluation

how is sales volume maximisation a disadvantage?

Answer 31

lower profits than sales revenue maximisation - zero profit

Question 32

evaluation

how is growth maximisation a disadvantage?

Answer 32

lower ptofitd than sales volume maximisation - profits will be negative (making a loss)