3.2 Business Objectives Flashcards
3.2.1 Business objectives
a) Different business objectives and reasons for them: Profit Maximisation
Explaination of Profit maximisation
What is it?
- Neo-classical economics assumes interest of owners/shareholders most important goal is profit maximisation in the short run (they aim to maximise their gain from the company)
- profit max occurs when MC=MR (optimal point) where the difference between TR and TC is greatest
3.2.1 Business objectives
a) Different business objectives and reasons for them:
Profit Maximisation
Reasons for Profit maximisation (x4)
- generate funds which may help survive a slowdown during a recession with short-run profit maximising (to prevent shut down)
- It provides greater wages and dividends for shareholders - owners of company = rewards through share of profit
- Retained profits are a cheap source of finance, which saves paying high interest rates on loans - Reinvestment- large profits mean businesses can reinvest into the business in the form of new capital, upgraded capital, new tech, R&D, innovation
- Some firms might profit maximise in the long run since consumers don’t like rapid price changes in the short run, so this will provide a stable price and output.
3.2.1 Business objectives
b) Diagrams and formulae to illustrate the different
business objectives: Profit Maximisation
The diagram shows that the firm will produce at P1Q1 where output is determined by where MC=MR and the price at this output is determined by the AR curve
3.2.1 Business objectives
a) Different business objectives and reasons for them: Revenue Maximisation
What is it and reasons for Revenue Max? ( x4 reasons)
What is it?
- occurs when total revenue made by a firm is the highest
- rev max - MR=0
Reasons for it?
- larger the sales revenue of the firm = higher the pay and prestige of senior managers
- Economies of scale - as seen on the diagram Revenue Max quantity is greater than profit Max quantity = greater growth and economies of scale, lower average costs = potential lower prices for consumers
- Predatory Pricing - Rev P lower the Profit max P= firm can undercut its competition by sacrificing profit to drive competition out of the market
- Principle Agent Problem (divorce between ownership and control) - behavioural economics concept of owners (principles) are shareholders but those who control are the managers (agents) = those who own do not control. Therefore managers may choose to rev max to use as leverage to go to shareholders and demand job perks eg new office, bonuses, insurance. V real life nature reason
3.2.1 Business objectives
b) Diagrams and formulae to illustrate the different
business objectives: Revenue Maximisation
- When a firm attempts to sell at a price which achieves the greatest revenue
- This occurs when MR=0
3.2.1 Business objectives
a) Different business objectives and reasons for them: Sales (Growth) Maximising
What is it and Reasons (4) for Sales Max
What is it?
- maximising sale volumes, the number of products they sell
- where AC=AR - normal profit
Reasons for it?
1. Economies of scale - as seen on the diagram there’s greater sales Max quantity = greater growth and economies of scale, lower average costs = potential lower prices for consumers
2. Limit Pricing - price represents the limit price. If you price at breakeven at normal profit it takes away the incentive for new firms to enter the market thus limiting competition
3. Principle Agent Problem (divorce between ownership and control) - behavioural economics concept of owners (principles) are shareholders but those who control are the managers (agents) = those who own do not control. Therefore managers may choose to sales max to use as leverage to go to shareholders and demand job perks eg new office, bonuses, insurance. V real life nature reason - by using growth or sales as leverage to go for perks
4. Flood the market - benefit cause from producing loads of output and selling it in the market = loads of consumers become aware of your product = develops loyalty so that potentially in the future the business objectives can be changed eg profit max
3.2.1 Business objectives
b) Diagrams and formulae to illustrate the different
business objectives: Sales Maximisation
- 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 - Prices are lower and output is higher than they would be under profit maximisation
3.2.1 Business objectives
a) Different business objectives and reasons for them: Satisficing
Profit Satisficing - think of key stakeholders
- When a firm is satisficing profit to satisfy as many key stakeholders as possible
- 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
Shareholders - happy - hgh dividends
Managers - happy - higher bonuses and incomes
Consumers -unhappy - excess prices could be charged
workers - unhappy - low wages due to cost cuts
government - unhappy - welfare loss for workers and consumers
environmental groups - unhappy - cost cuts = cost to environment eg pollution, resource degridation
