3.2 Business Objectives Flashcards
Business Objectives
Firm’s motives determined by who controls it
Range of people who can have control
=> owner/shareholders, directors/managers, workers (trade union), state (regulation, taxes/subsidies, direct control), consumers (consumer sovereignty) and pressure groups
Profit Maximisation
Reasons
Neo-classical economics assumes interest of owners/shareholders is most important so goal of profit maximisation in short run
Firms can also generate funds for investment and to help survive a slowdown during a recession with short-run profit maximising
Profit Maximisation
Explanation
Firms produce where MC = MR (optimal point)
If less is produced, then producing more until the optimal point increases profit since MR > MC => increased profits
If more is produced, then a loss is made on the foods produced above the profit maximising point
Profit Maximisation
Diagram
The diagram shows that the firm will produce at P1Q1
Output is determined by where MC=MR and the price at this output is determined by the AR curve
Revenue Maximisation
Reasons
Suggested managers are more interested in their level of revenue since this is what affects their salary
Even when their salary is not directly connected to sales revenue, increase in revenue is positive for business => increase in prestige and used as justification to shareholders for managerial rewards
Fall in revenue is negative as it reduces salary and could start downward spiral for company => fall in staff and less likely to receive loans
Therefore firms revenue maximise as long as profit is provided to owners
Revenue Maximisation
Diagram
Firms would produce where MR=0, since if marginal revenue is above 0 producing more would increase revenue
This means they produce Q2P2, whilst profit maximisation would produce at Q1P1
Prices would be lower than when they are profit maximising since they are producing more
Sales Maximisation
Suggested managers aim to maximise growth of company => salary linked to size of company
Easier for people to judge level of growth achieved rather than level of profit => increases prestige
Size often linked to security => large firms can survive rough periods
Growth also increases market share
Short term strategy
Sales Maximisation
Diagram
Firm will want to get the highest level of sales possible without making a loss
They will want to ensure sufficient returns to keep the owners happy => aim for normal profits
=> they produce where AC=AR at P2Q2
Prices are lower and output is higher than they would be under profit maximisation
Sales and Revenue Maximisation Disadvantage
They necessitate a fall in price, which other firms may copy and so there may be no or little increase in revenue or sales => important in oligopoly
=> Lower profits
Satisficing
Due to principal agent problem, owners and directors have different goals
Managers thus profit satisfice => make enough profit to keep owners happy while following other objectives and not profit maximising, for their own benefit
Amount of profit needed changes yearly and is dependant on many other factors
Business Objectives
Profit Maximisation
Revenue Maximisation
Sales Maximisation
Satisficing
Managerial Utility Maximisation
Marginal Cost Pricing / Allocate Efficiency
Managerial Utility Maximisation
Managers make decisions to maximise their own salary
Dependant on their salary, number of staff they control, power over decision making and other benefits received
Marginal Cost Pricing / Allocative Efficiency
Some firms aim to maximise social welfare
This can be done by producing where the value society places on the good is equal to the extra cost of producing that good
This achieves allocative efficiency
