3.2 Business Objectives

Question 1

What are the 3 different business objectives?

Answer 1

• Profit Maximisation
• Revenue Maximisation
• Sales Maximisation

Question 2

Why may a firm aim to profit maximise?

Answer 2

• Increase re-investment; new capital, R&D; overcome recession
• Greater dividends for shareholders
• Lower costs & lower prices for consumers

Question 3

Where does profit maximisation occur?

Answer 3

MC = MR
Producing higher output; costs will be higher than revenue – generates loss
Producing lower outputs; each extra unit to the right generates profit until MC=MR.

Question 4

Why may firms not want to operate at profit max?

Answer 4

• Greater scrutiny; Large profits may bring regulators to suspect upon businesses causing investigation.
• Key stakeholders
• Other objectives may be more appropiate

Question 5

What is profit satisficing?

Answer 5

Sacrificing profit to satisfy as many key stakeholders as possible.

Question 6

4 examples where profit satisficing occurs.

Answer 6

Consumers
- Large profits may mean consumers are being charged high
Workers
- Wages may be low to meet cost cutting
Government
- Excess prices for consumers and low wages
Environmental Groups
- cost cut causes environment hit e.g waste dumping, pollution

Question 7

Why may firms tend towards profit saticficing to prevent harm to certain stakeholders?

Answer 7

Consumer harm - Bad reputation
Workers harm - Workers strike
Government - Investigate; outcome will be anti-business
Environment groups - attack on social media, protest

Question 8

What is revenue max and when does it occur?

Answer 8

Revenue max is when firms aim to maximise revenue; occurs at MR=0.

Question 9

Why may a firm aim to revenue max?

Answer 9

• Revenue max allows EofS to be utilised fully. QRevMax > QProfMax; greater growth, greater EofS, lower AC, lower consumer price
• Predatory Pricing; firm undercut rivals, sacrificing profit, in order to drive out competitors.
• Principle Agent problem

Question 10

What is sales maximisation and where does it occur?

Answer 10

Sales maximisation is when a business wants to become as large as possible without making a loss. AC=AR

Question 11

Why may a firm aim to sales max?

Answer 11

• Gain EofS
• Limit pricing; pricing at normal profit takes away incentive for other firms to enter the market, limits competition.
• Principle Agent problem
• Flood market; produce loads of output; firm exposure increases; consumers develop loyalty.