3.1 Business Objectives

Question 1

What is meant by profit

Answer 1

It is the difference between total revenue and total cost.

It is the reward that entrepreneurs yield when they take risks

Question 2

When do firms break even

Answer 2

When TR = TC

Question 3

How does a firm profit maximise

Answer 3

When they are operating at the price and output which derives the greatest profit.

Occurs where MC = MR

Each extra unit produced gives no extra loss or no extra revenue

Question 4

How can you show a profit increase or decrease

Answer 4

Increase when MR > MC

Decrease when MC > MR

Question 5

Why might a firm choose to profit maximise

Answer 5

Provides greater wages and dividends for entrepreneurs

Retained profit is cheap finance as avoids interest on loans

Interest of shareholders are most important

Question 6

Why are PLC’s keen to profit maximise

Answer 6

They could lose shareholders if they do not receive high enough dividend

More likely to short run profit maximise in order to keep shareholders happy

Question 7

What is meant by normal profit

Answer 7

The minimum reward required to keep entrepreneurs supplying their enterprise

Covers opportunity cost of investing into the firm

Question 8

What is meant by supernormal profit

Answer 8

The profit above normal profit

Exceeds opportunity cost of investing

Question 9

What is meant by sales revenue maximisation

Answer 9

Occurs when MR = 0

Each extra unit sold generates no extra revenue

Question 10

What diagram shows sales revenue maximisation

Answer 10

Question 11

What is meant by sales volume maximisation

Answer 11

This is when the firm aims to sell as much of their goods and services as possible without making a loss

Where AC = AR

Question 12

Explain a diagram showing all the three objective (Profit, Sales and Revenue maximisation)

Answer 12

Question 13

What is meant by growth maximisation

Answer 13

Some firms aim to increase size of their firm

In order to take advantage of economies of scale

This can lower average costs in long run making them more profitable

Question 14

What is meant by increasing market share

Answer 14

This helps increase the chance of surviving in the market

Can be achieved by sales maximising

Question 15

What is meant by utility maximisation

Answer 15

For consumers is when they aim to generate the highest utility from an economics decision

Firms aim to generate highest profits

Consumer utility is total satisfaction from consuming a good or service

Question 16

What is meant by profit satisficing

Answer 16

When a firm is earning just enough profits to keep its shareholders happy.

Question 17

What is meant by social welfare and corporate social responsibility

Answer 17

Some firms might take responsibility for consequences on the environment and aim to maximise social welfare

Firms might try to perform more ethically, especially if they have a philanthropic owner

Question 18

What is the principal-agent problem

Answer 18

When the agent makes decisions for the principal, but the agent is inclined to act in their own interests, rather than those of the principal

Question 19

Give an example of the principal-agent problem

Answer 19

Shareholders and managers have different objectives which might conflict

Managers might aim to make a personal gain such as a bonus instead of maximising the dividends for shareholders

Question 20

What does the kinked demand curve model look like

Answer 20

Question 21

What does the kinked demand curve illustrate

Answer 21

The feature of price stability in an oligopoly

It assumes other firms have an asymmetric reaction to a price change by another firm

Illustrates interdependence between firms