3.2 business objectives Flashcards
why might firms profit maximise?
Neo-classical economics assumes that the interests of owners or shareholders are the most important and therefore the goal of firms is to profit maximise in the short run, in order to maximise owners’ returns. By short-run profit maximizing, firms can also generate funds for investment and to help them survive a slowdown during a recession.
what is a real example of markets where firms might want to profit maximise?
Apple and pharmaceutical companies are likely to profit maximise since they need the money to reinvest.
what is the profit maximization point in the short run?
MC=MR
why might firms revenue maximise?
managers are most interested in their level of revenue
since this is what their salary depended on. Even when their salary is not directly connected to sales revenue, they knew that a growth in revenue was always likely to be a positive for the business. It increases their prestige and is used as a justification to shareholders for managerial rewards. A fall in revenue would be negative as it would not only reduce their salary but could signal the start of a downward spiral for the company. It could lead to a fall in staff and financial institutions may be worried and less willing to lend money. As a result, many firms may aim to revenue maximise as long as they provide some profit for the owners.
what is an example of firms profit maximising?
Amazon follow an objective of revenue maximisation, with revenue nearing £120bn in 2015 but profit staying relatively stable. Their aim is to dominate the market.
what is the revenue maximisation point?
MR=0
why might firms sales maximise?
managers aim to maximise the growth of their company above any other objective. This is because their salary may be linked to the size of the company. It is often easier for people to judge the level of growth achieved rather than the level of profit. This will increase the prestige of the business. Size is often linked to security as it is believed large firms can survive rough periods much easier and are less likely to get into financial trouble overnight. Growth will also increase market share, and may push other firms out of business. It will enable a firm to have more market power and more power over prices. This tends to be a short term strategy , and in the long term firms are more likely to profit maximise.
what are examples of firms that sales maximise?
Netflix and Spofity follow the objective of sales maximisation, as they are attempting to increase the size of their businesses.
what is the sales maximization point?
AC=AR
what is the issue with sales or revenue maximisation?
The problem with both sales maximisation and revenue maximisation is that it necessitates a fall in price , which other firms may copy and so there may be no or little increase in revenue or sales: this is important in oligopoly. They also bring lower profits.
what is profit satisfying and why does this occur?
Due to the principal-agent problem, owners and directors will have different goals. Directors will want to maximise their own benefits but will need to make a certain amount of profit in order to keep their jobs, receive benefits and avoid criticism from shareholders/the press. Therefore, managers are likely to follow the objective of profit satisficing: they will
make enough profit to keep owners happy whilst following other objectives and not profit maximizing. These other objectives are likely to be their own benefits, for example they may increase their own salaries which increases costs and therefore
decreases profit.
what determines the level of profit during profit satisiftying?
The amount of profit needed will change year on year and will depend on the level of profit made by other firms: if everyone else is making a loss, and the firm only manages normal profit then this will be good enough for shareholders but if other firms are making huge profits, shareholders too will expect huge profits.
what is managerial utility maximisation?
when managers will make decisions to maximise their own satisfaction.
what determines the level of managerial utility maximisation?
this is dependent on their salary, the number of staff they control, their power over decision making and the other benefits they receive.
what is marginal cost pricing?
this is usually done by nationalised firms and its when the aim is to maximise welfare. this occurs when they producing where the value society places on the good is equal to the cost of producing that good ie AR=MC
