3.1.3 Business Objectives

Question 1

Profit maximisation

Answer 1

Profit maximization is the short run or long run process by which a firm may determine the price, input and output levels that lead to the highest profit.

Question 2

Revenue maximisation

Answer 2

Revenue Maximization is a point at which a business keeps selling till marginal revenue does not fall negative. Therefore maximises the total money coming into the business.

Question 3

Sales volume maximisation

Answer 3

A theoretical objective of a firm which involves selling as many units of a good or service as possible, without making a loss. This means sacrificing some short-term profit with a view to achieving a longer term gain.

Question 4

Behavioural theories

Answer 4

The effects of psychological, cognitive, emotional, cultural and social factors on the decisions of individuals and institutions and how those decisions vary from those implied by classical economic theory

Question 5

Satisficing

Answer 5

A decision-making strategy that aims for a satisfactory or adequate result, rather than the optimal solution. Instead of putting maximum exertion toward attaining the ideal outcome, satisficing focuses on pragmatic effort when confronted with tasks.

Question 6

The significance of the divorce of ownership from control for business objectives:

Answer 6

Principle agent problem

Other shareholders can exercise their voting rights, and providers of loans often have some control (security) over the assets of the business. This may lead to conflict between them as different shareholders can have varying objectives.

Question 7

Formula for profit maximisation

Answer 7

Profit = Total Revenue (TR) – Total Costs (TC). Therefore, profit maximisation occurs at the biggest gap between total revenue and total costs.

Where MR = MC

Question 8

Formula for revenue maximisation

Answer 8

At the point of maximum total revenue m the slope of the total revenue curve is zero and the marginal revenue is therefore also zero. The marginal revenue curve thus crosses the horizontal axis at the quantity at which the total revenue is maximum.

Where MR = 0

Question 9

Formula for sale volume maximisation

Answer 9

Sales maximisation can be given by the formula AR=AC. If a firm is sales maximising then supernormal profit will equal 0; however the firm will still make a normal profit