1.5.2 The objectives of firms Flashcards
profit maxing rule
MC (marginal cost) = MR (marginal revenue)
main objective
maximising profit = main ASSUMPTION, comprrimises traditional theory of firm
making large profits enables firms to:
- reinvest funds to develop new products that lead them to gain more customers.
- pay out higher returns to shareholders, may encourage more ppl to buy shares in company or boost share price
MC=MR diagram
m = profit minimising as cost of everyunit of output before has exceeded the addition to TR
m1 = profit max
what is ‘divorce of ownership from control’?
the separation that exists between owners of the firm (shareholder) and directors in large public limited companies
problems posed by divorce of ownership from control?
- proft max not always achieved
- large corps may be predominately owned by shareholders who are separate from day to day running of business.
- conflicting objectives
objectives of directors who run business on day-to-day basis
- growth maximisation = boost media publicity, reduce threat of takeover by other firms
- sales rev max = pay and bonuses linked to annual sales
- satisficing = suboptimal level of profit over maximal one
the satisficing principle
= mking due w/ satisfactory, suboptimal level of profit
- shareholders happy
- managers oporating w/ imperfect info
- realistic view
sales maximisation
- firms sales rev at max
- occours = level of output at whoch sale of one more unit would not add to overall revenue.
- helps firms benefit from econ of scales
survival
survive critical period before it establishes customer base and cover costs
growth
- increasing output, scale of productions, product base, size of workforce
- allows firms to take advantage of economies of scale
increasing market share
higher market share for particular product - gives firm benefit of monopoly BUT may attract attention of gov (fear of firms absuing power)
stakeholder objectives
- satify their needs
= any individual or group w/ an interest in how a business is run
