3.2 Business Objectives

Question 1

Who has control over the business

Answer 1

• Owners or Shareholders
• Directors and Managers
• workers through a trade union
• state through regulation, taxes/subsidies and direct control
• consumers through their consumer sovereignty
• pressure groups

Question 2

In order to maximise int he short run where should firms produce

Answer 2

MC=MR

Question 3

Neo-classical economics - profit maximisation

Answer 3

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.

Question 4

what does profit maximisation in the SR lead to

Answer 4

generate funds for investment and to
help them survive a slowdown during a recession.

Question 5

What happens if firms produce less than MC=MR

Answer 5

then producing more will increase profit since MR would be higher than MC so they’re making more in revenue than it costs to produce the good and so producing more would
increase profit

Question 6

What happens if firms produce more than MC=MR

Answer 6

they would be making a loss on the goods
produced above the profit maximising point and so they should decrease production

Question 7

What did Baumol suggest about managers and revenue

Answer 7

he suggetsed that managers are most interested in revenue as this is what their salary depends on

Question 8

What does revenue maximisation lead to apart from salary

Answer 8

• increase prestige of the business
• managerial rewards

Question 9

why is a fall in revenue negative

Answer 9

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.

Question 10

To revenue maximise where shoudl firms produce

Answer 10

MR=0

Question 11

What does Marris say about managers and sales

Answer 11

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.

Question 12

why is it important for sale to increase over profit

Answer 12

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.

Question 13

Correlation between sales and security

Answer 13

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.

Question 14

Corrlation between sales and market share

Answer 14

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.

Question 15

Wher do firms produce i order to sales maximise

Answer 15

AC=AR

Question 16

What does the principle agent problem cause

Answer 16

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.

Question 17

Managers and profit satisficing

Answer 17

• They will make enough profit to keep owners happy whilst following other objectives and
  not profit maximising.
• 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.