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Economics - Theme 3 > 3:3:1 - Business Objectives > Flashcards

3:3:1 - Business Objectives Flashcards

1
Q

What are Firms objectives?

A

To maximise profits (can be maximise revenue & sales)

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2
Q

What is Profit Maximisation?

A

Occurs where MC = MR. Where Firms maximise profits or minimise losses

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3
Q

Is abnormal profit being made were MC = MR?

A

No

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4
Q

What the benefits of Profit Maximising?

A
  • Shareholders likely to benefit from higher dividends
  • Employees may gain if some part of their pay is linked to the profitability of the business
  • Higher profits may lead to increased capital spending which will benefit businesses in industries such as engineering and construction
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5
Q

What are the Problems with Profit Maximising?

A
  • Higher prices for consumers which reduces their real incomes / purchasing power and means a lower level of consumer surplus
  • High profits might act as an incentive for new firms to enter the market – depending on how contestable it is – which in the longer term might reduce the returns to shareholders as competition intensifies
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6
Q

What is Revenue Maximisation?

A

Is when a firm seeks to make as much revenue as possible. Marginal Revenue = 0

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7
Q

When maximising revenue up to what point are Firms willing to sell up to?

A

Until Marginal Revenue = 0

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8
Q

What happens to marginal revenue as a firm expands its output?

A

Marginal Revenue declines

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9
Q

Whilst marginal revenue is positive what affect does this have on total revenue?

A

Whilst marginal revenue is positive total revenue continues to increase.

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10
Q

What is Sales maximisation?

A

Occurs when a Firms attempts to sell as much as it can without making a loss

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11
Q

At what point is Sales Maximisation achieved?

A

Average Cost = Average Revenue

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12
Q

Why might Firms want to sales Maximise?

A
  • Gain market share

- Drive rivals out of the industry

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13
Q

Drawbacks of Sales Maximisation?

A
  • Firm May be making normal profit
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14
Q

Difference between Sales Maximisation and Sales Revenue Maximisation?

A

Sales revenue Maximisation is another name for Revenue Maximisation.

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15
Q

What is Allocative Efficiency?

A

Producing at a point where the price of a good is equal to the marginal cost of production

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16
Q

Where is Allocative Efficiency on a graph?

A

Where price equals marginal cost

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17
Q

What is Satisficing?

A

Making just enough profit to keep stakeholders happy.

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18
Q

Who are stakeholders?

A

People who have an interest in the company

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19
Q

What is the point of Pricing Strategies?

A

To gain market share or increase profitability in the long run whilst sacrificing short-Run profits

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20
Q

What is Predatory Pricing?

A

Pricing below the costs to drive out other other firm

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21
Q

Disadvantages of Predatory Pricing.

A
  • In the short run the firm makes a loss

- Is anti-Competitive behaviour and can lead to fines being imposed by the competition authorities

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22
Q

What are the advantages of Predatory Pricing?

A
  • Causes Firm to leave the market, so prices are raised
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23
Q

What is Limit Pricing?

A

Pricing at a level low enough to discourage entry of new firms.

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24
Q

How does Limit Pricing actually work?

A

Because bigger business can exploit greater economies of scale than smaller businesses

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25
Q

How does Predatory + Limit Pricing Benefit the Consumers?

A

In the short run, gives consumers low prices

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26
Q

How does Limit + Predatory Pricing negatively affect the consumer?

A

It drives out competition from the market, giving the firm monopoly power. It can then raise prices, reducing consumer surplus and consumer choice.

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27
Q

How do Pricing Strategies affect Consumer Loyalty

A

Discount pricing lead to greater consumer loyalty, thereby increasing long-run profits

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28
Q

What is a alternative to Limit and Predatory Pricing?

A

Non-price Competition

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29
Q

Any action by a firm that does not involve changing price comes under which category…

A

Non-price differences

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30
Q

What are Non-Price Competition methods?

A
  • Advertising
  • Increased investment in branding
  • Packaging
  • After car / Customer Service / Warranties
31
Q

What is the aim of Non-Pricing strategies?

A
  • Increase demand for the good being sold and to reduce the price Elasticity of Demand by reducing the availability of substitutes, without changing price
  • Shift the average revenue (Demand) Curve to the right
  • To prevent it from falling as other firms increase their market share
32
Q

What must be true for Non-Price Competition methods to benefit?

A

Cost of the non-price competition method must be below the increase in supernormal profit if it is to be of any benefit

33
Q

Do Non-Pricing Strategies work?

A
  • Other Firms May copy and increase their advertising, spending large sums on advertising is no key to success.
34
Q

Evaluative points for Non-Pricing Strategies.

A
  • Does the firm have the money to back up any planned non-price competition strategies
  • how long will it take?
  • Will it actually work especially with rival firms?
35
Q

Firms are assumed to be ….

A

Profit Maximisers

36
Q

Where is Profit Maximisation?

A

MC = MR

37
Q

Where is Revenue Maximisation?

A

MR = 0

38
Q

Where is Sales Maximisation?

A

Is where a firm can sell as much as it can without making a loss
AC = AR

39
Q

What is the fundamental economic problem?

A

There is a scarcity of resources

40
Q

Define Efficiency.

A

is concerned with the optimal production and distribution of these scarce resources.

41
Q

What is Productive Efficiency?

A

occurs when the maximum number of goods and services are produced with a given amount of inputs. This will occur on the production possibility frontier.

42
Q

Where does Productive Efficiency occur graphically?

A

At the lowest point of the Average Cost (AC) Curve.

43
Q

What is Allocative Efficiency?

A

occurs when goods and services are distributed according to consumer preferences.

44
Q

Graphically were does Allocative Efficiency occur?

A

Allocative efficiency occurs when the price of the good = the MC of production.

45
Q

What is X Inefficiency?

A

This occurs when firms do not have incentives to cut costs, for example, a monopoly which makes supernormal profits may have little incentive to get rid of surplus labour.

46
Q

How is a Firm graphically X Inefficient?

A

If a Firms Average Cost Curve is greater than it should be

47
Q

To be productively efficient means the economy must be producing on its […………..]

A

Production Possibility Frontier

48
Q

What is the link between productively efficient and technically efficient?

A

A firm is technically efficient when it combines the optimal combination of labour and capital to produce a good.

49
Q

What is Allocative Efficiency in terms of resources?

A

Allocative efficiency is concerned with the optimal distribution of resources.

50
Q

Define Allocative Efficiency.

A

is at an output level where the price equals the Marginal Cost (MC) of production.

51
Q

Why is Allocative Efficiency at an output level where the price equals the Marginal Cost (MC) of production?

A

This is because the price that consumers are willing to pay is equivalent to the marginal utility that they get. Therefore the optimal distribution is achieved when the marginal utility of the good equals the marginal cost.

52
Q

What is the link between Allocative Efficiency and Perfect Competition?

A

Firms are said to produce Allocatively efficient level in Perfect Competition. P=MC

53
Q

Are Monopolies Allocatively Efficient or Inefficient ?

A

Allocative Inefficient

54
Q

Why are Monopolies Allocatively Inefficient?

A

Monopolies can increase price above the marginal cost of production and are allocatively inefficient. This is because monopolies have market power and can increase price to reduce consumer surplus.

55
Q

Difference Between Allocative and Productive Efficiency?

A
  • Productive Efficiency is concerned with producing goods at the lowest cost.
  • Allocative efficiency is concerned with the distribution of goods and this requires the addition of indifference curves.
56
Q

The difference between actual and potential costs is the […………]

A

X Inefficient

57
Q

What are the causes of X Inefficiency?

A

• Monopoly Power - A monopoly faces little or no competition. Therefore, it might be easy for the monopolist to make supernormal profits. Therefore, in the absence of competitive pressures, they may not try very hard to control costs.
• State Control - A nationalised firm owned by the government may face little or no incentive to try and make a profit. Therefore, it has less incentive to try and cut costs.
•

58
Q

What is Economies of Scale Graphically?

A

This occurs when the firms produces on the lowest point of its long-run average cost (Q2) and therefore benefits fully from economies of scale.

59
Q

Define Economies of Scale?

A

occur when increasing output leads to lower long-run average costs.

60
Q

Why is Economies of Scale useful for a business?

A

Economies of scale are important because they mean that as firms increase in size, they can become more efficient.

61
Q

What is Dynamic Efficiency?

A

This refers to efficiency over time.

62
Q

How does a firm become Dynamically Efficient?

A

By introducing of new technology and working practices to reduce costs over time.

63
Q

What effect will Dynamic Efficiency have graphically?

A

will enable a reduction in both SRAC and LRAC.

64
Q

Factors that affect Dynamic Efficiency?

A
  • Investment – investment in new technology and improved capital can enable lower costs in future
  • State of technology - The rapid development of technology can enable firms to produce more for lower costs.
  • The motivation of workers and managers
  • Access to finance - A firm without access to finance will struggle to invest in new capital which will enable lower costs.
65
Q

What is Social Efficiency?

A

This occurs when externalities are taken into consideration and occurs at an output where the social cost of production (SMC) = the social benefit (SMB)

66
Q

Social Efficiency occurs at an output where [………………………]

A

Marginal Social Benefit (MSB) = Marginal Social Cost (MSC).

67
Q

What is the Social Benefit equation?

A

Social benefit = private benefit + external benefit

68
Q

What is the Social Cost Equation?

A

Social cost = private cost + external cost

69
Q

What is the Link between Negative Externalities and and Social Efficiency?

A

If a good has a negative externality – ignored by individuals, then in a free market, we tend to get over-consumption and social inefficiency.

70
Q

Implications of Social Efficiency.

A

It is important to take into account externalities. (both positive and negative) It can be difficult to measure externalities, but we need to make an effort. Government intervention – taxes and subsidies can attempt to influence production and consumption to achieve social efficiency.

71
Q

What is Technical Efficiency?

A

This requires the optimum combination of factor inputs to produce a good.

72
Q

A firm is said to be technically efficient if a firm is producing the […………] output from the [………….] quantity of inputs, such as labour, capital, and technology.

A

1 - Maximum

2 - Minimum

73
Q

What is the link between technical Efficiency and the PPF Curve?

A

Technical efficiency requires no unemployment of resources.

Same as if the firm was on the curve of the PPF

74
Q

What is Pareto Efficiency?

A

A situation where resources are distributed in the most efficient way. It is defined as a situation where it is not possible to make one party better off without making another party worse off.

Economics - Theme 3 (8 decks)

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