3.2 Business objectives Flashcards
What is the condition for profit maximisation
MC=MR
What is the condition for revenue maximisation
MR=0
What is the condition for sales maximisation
AR=AC
What is the effect on TR if price increased or decreased if a firms objective was revenue maximisation
- If P’s were cut= TR would fall
- If P’s were raised= TR would fall
Why might a firms aim to maximise sales revenue rather than profits
Incumbent businesses wish to deter the profitable entry of new firms/ rivals into an industry
Robin Marris theory on sales max
Managers aim to maximise the growth of their company above any other objective
Increase market share, consequently increase growth
Consequences if firms decide to aim to maximise sales revenue rather than profit
Reduction in the price of the firm’s shares since profit is likely to be lower
Which business objective would consumers want
Consumers want firms to be sales maximisers as quantity is the highest
William Baumal
What is the principle agent problem
Conflict of interest between principle (shareholders) and agent (managers/ CEOs), which creates problems for firms.
Principle- Agent problem example
It can occur when the managers act in their interests by seeking opportunities that enable them to receive more incentives and compensations/ CEO’s reinvests profits back to the company to enusre its growth, while the shareholders expect to receive dividends.
Shareholders= Profit maximisers
Managers/ CEO’s= revenue/ sales maximisers
Why might firms want to achieve profit maximisation
Firms aim to maximise profits because this will provide the largest amount of money to reinvest in the business, which can contribute to improving productive and allocative efficiency. This, in turn, enables the firm to reduce its prices and, because of this, improves its competitiveness, resulting in greater market control, which can secure the firms future survival and growth.
