3.1 business objectives Flashcards
what is profit maximisation?
MR=MC
they make supernormal profit (AR>AC)
why would a firm want to profit maximise?
-reward for the risk of the business venture
- to satisfy shareholders : rising share price (weath) and rising dividends (income)
what happens to the profit max output as demand rises?
demand rises - AR shifts out
therefore MR shifts out
new PMO where MR2=MC
what is sales revenue maximisation?
when MR=0
this is because they will charge a lower cost to sell extra output.
they still make a supernormal profit
what happens to … when moving from PMO to SRM?
output
profit
price
output- increases
profit- decreases therefore shareholders loose out, less profits for dynamic efficiency
price- falls and there is an increase in consumer surplus and consumer welfare
what is sales volume maximisation?
where firms can target the highest possible quantity of sales to increase market share.
AC=AR
break even - normal profit
which objective is profit the highest/lowest?
highest - PMO
lowest - SVM
at which objective is output the highest?
SVM
at which objective is price the lowest?
SVM
what are the implications for firms choosing SVM?
- highest output and market share
-normal profit
-principal agent problem
-less room for investment
-less for shareholders
what are the implications for consumers at SVM?
- lowest price so most surplus and therefore welfare
-more available
-little dynamic efficiency, quality falls
what is growth maximisation?
when firms wish to increase market share and gain power, which may enable them to set prices and control the market.
what is utility maximisation?
gaining satisfaction in various ways e.g managers big office, company car, status
this will take the firm away from PMO and result in X-inefficency
what is profit satisficing?
behaviour under which the managers of the firm aim to produce satisfactory results for the firm so sim for satisfactory profits.
somewhere in-between PMO and SVM
this helps resolve objective conflicts
what is social welfare as an objective?
not all firms aim to make profits e.g charities and NPOs
what are the case studies for social welfare?
Aurat collective-Pakistan- women a safe space to learn pray and adhere to their needs
Aravind eyecare-India- pay what you can eyecare
The social supermarket- £4 a month for a weekly food shop- cost of living and reduction in food waste.
what is corporate social responsibility?
firms with charitable and environmental objectives, giving back to the community which requires funding at the cost of profit
why may a firm embrace CSR?
- reputation
-contracting benefits e.g recruitment
-customer motivation
-lower production costs e.g packaging
-risk management due to less regulation
-improved access to capital due to reputation
what is the debate for and against CSR?
for - CSR view- businesses depend on society, relying on inputs therefore should give back.
against- free market view- the job of businesses is to create wealth for shareholders and they cannot decide what societies interest is in.
there is an extra cost
it stifles innovation.
what is the principal agent problem?
when there is conflict between the aims of owners and managers.
this occurs when there is a divorce of ownership.
this may arise due to asymmetric information whereby managers have better information.
what is x-innefficiency?
when the firm operates above LRAC
the firm is not focused on minimising costs so operate at a higher cost level
there is organisational slack and negligency
what are the evaluating factors of objectives?
-owners- serve own interests or may sacrifice SR profits for LR gains
-there may not be a divorce
-managers salaries may be linked for sales or profits etc
-depends on size of the firm
-the market environment:
market structure - competition?monopoly power?not much competition means steep AR (PED inelastic) few subs, may satisfice
external factors - recession goal is to survive, in a boom prof max
what are the evaluating arguments of max and non max objectives?
-all strategies diverge from profit e.g CSR = credibility = consumers
- most profit seeking but not max
- satisfying most common
-businesses learn from experience
-prof max as a benchmark
