3.2

Question 1

profit maximisation

Answer 1

Neo-Classical Economics: Assumes the interests of owners/shareholders are paramount, aiming to profit maximise in the short run to maximise returns.

Reason: Generates funds for investment and survival during a recession.

Example: Companies like Apple and pharmaceutical firms profit maximise to reinvest in growth.

Condition: Produce where MC=MR (Marginal Cost = Marginal Revenue). Producing less than this means MR > MC, increasing profits. Producing more means losses on excess goods.

Question 2

revenue maximisation

Answer 2

Reason: Higher revenue justifies managerial rewards and signals company growth.

Example: Amazon aims for revenue maximisation to dominate markets.

Condition: Produce where MR=0 (Marginal Revenue = 0) to maximise revenue.

Question 3

sales maximisation

Answer 3

Reason: Salary linked to company size, easier to judge growth than profit, increases market share and security.

Example: Netflix and Spotify maximise sales to grow their businesses.

Condition: Produce where AC=AR (Average Cost = Average Revenue) to achieve normal profits and avoid losses.

Question 4

satisficing

Answer 4

Due to the principal-agent problem, managers make sufficient profit to keep owners happy while pursuing other objectives.

Reason: Balances profit with managerial benefits (e.g., salaries), avoiding excessive scrutiny.

Condition: Profit level changes yearly based on other firms’ performance.

Question 5

allocative efficiency

Answer 5

Some firms, particularly nationalised industries, aim to maximise social welfare by producing where the value society places on the good equals the extra cost of producing that good (MC=AR).

Key Points:

Allocative Efficiency: Achieved when resources are allocated to produce the quantity of goods/services most valued by society.

Example: A nationalised industry may set prices to reflect the marginal cost of production, ensuring that goods are affordable and accessible.