3.2 Business Objectives Flashcards
What is profit maximisation
● 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. It is for this reason that we assume that firms profit maximisation for all market structures in unit 4.
What is an example in the real world of profit maximisation
Apple and pharmaceutical companies are likely to profit maximise since they need the money to reinvest.
Draw and explain a profit maximisation diagram
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What is revenue maximisation
● William Baumol suggested 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.
What is the result of revenue maximisation
● 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 a revenue maximising company
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.
Draw and explain a graph of revenue maximising
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What is sales maximisation
● Robin Marris suggested that 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 is a real world example of sales maximisation
Netflix and Spofity follow the objective of sales maximisation, as they are attempting to increase the size of their businesses.
Draw and explain a graph of sales maximisation
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What is profit satisficing
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 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.
How can the level of profit satisficing be impacted
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 the cause of profit satisficing
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.
