3.2 business objectives Flashcards
what is profit maximisation?
firms set price and output based on MC=MR, assumption of maximising profit in the short run, assumed in majority of market structures
when is profit maximisation more likely?
way to increase their ability to pay shareholder dividends and increase share value, also creates larger funds for investment and R&D, retained profit and reinvestment
why might firms not profit maximise?
-imperfect information
-may not be possible to achieve a price and output exactly at MR=MC
-long run profits may be improved by focusing on other short-run goals such as capturing market share
what is sales maximisation?
maximising the volume of sale, not value of sales, firms set price and output based on AR=AC which represents largest level of output that a firm can produce without making a loss
when is sales maximisation more likely?
firms may sales maximise in order to increase market share, could be used as part of a limit pricing strategy, can avoid the attention of the competition authorities
why might firms not sales maximise?
require forgoing significant supernormal profits in the short run
what is revenue maximisation?
firm sets price and output based on MR=0, firm produces up to a point where producing extra units stops adding to revenue of firm
when is revenue maximisation more likely?
managers may receive performance related pay based on revenue targets, larger revenue makes company ‘bigger’, greater justification for large executive pay
why might firms not revenue maximise?
revenue based rewards structures require a very measurable success criteria, firms that aren’t in sales focussed might be less likely to implement a revenue based rewards structure
what is satisficing?
managers of a firm ensure that they make enough profit for shareholders to be satisfied, once enough profit is achieved they may then perue other managerial objectives
when is satisficing more likely?
when directors of a company have personal goals which differ from goals of shareholders, directors earn enough profits to satisfy shareholders can pursue their own goals
why might firms not do satisficing?
difficult for directors to know level of profits that shareholders would deem to be enough, may not feel secure enough to aim for anything less than maximum profits
what is survival?
objective of the firm is to remain in business in the future, likely to have adverse behaviour
when is survival more likely?
some smaller businesses may have survival as their default objective, during recession to be replaced by profit maximisation when the economy improves
why might firms not do survival?
without innovating a firm may become less relevant to consumers over time, threatening there viability
what are social objectives?
pursuing social and charitable goals rather than profit-based goals
when are social objectives more likely?
not-for-profit organisations, price and output may be determined by need and circumstance, charitable and public sector organisations may have social reasons for operating
why might firms not revenue maximise (social objectives)?
some firms appear to be aiming for social objectives but may be marketing business as being socially responsible whilst actually pursuing profit maximisation
why large firms might become more profit-orientated?
-greater potential to price discriminate when operations are larger, incentive for profit maximisation
-more likely to be PL, profit required for dividends
why large firms might become less profit-orientated?
-inertia/lack of competition
-avoid attention from competition authorities
-greater divorce between ownership and control
