3.2 business objectives

Question 1

Different business objectives

Answer 1

• profit maximisation
• revenue maximisation
• sales maximisation
• satisficing

Question 2

Profit maximisation in neo-classical economics

Answer 2

• Neo-classical economics assumes the interests of shareholders are the most important, and assume that the aim of firms is short-run profit maximisation.

Question 3

Profit maximisation in neo-Keynesian economics

Answer 3

• Neo-Keynesian economists assume that firms maximise long-run profit instead of short-run profit, based on the belief of cost-plus pricing.
• According to neo-Keynesian economics, rapid price changes in the short-run can damage a firm’s place in the market.

Question 4

Condition for profit maximisation

Answer 4

• In order to short run maximise, firms produce where MC=MR.
• If they produce less than this, 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.
• If they produce more than this, they would be making a loss on the goods produced above the profit maximising point and so they should decrease production.

Question 5

Revenue maximisation

Answer 5

• Said to occur because of control by directors and managers who want to increase their pay and prestige.
• This occurs when MR = 0, as every unit up to that point contributes to revenue. It can also occur for long term plans like brand awareness.

Question 6

Condition for revenue maximisation

Answer 6

To revenue maximise, firms would produce where MR=0, since if marginal revenue is above 0 producing more would increase revenue

Question 7

Sales maximisation

Answer 7

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 8

Condition for sales maximisation

Answer 8

In order to sales maximise, the firm will want to get the highest level of sales possible without making a loss. They will want to ensure sufficient returns to keep the owners happy, so will aim for normal profits. As a result, they produce where AC=AR

Question 9

Satisficing

Answer 9

• People who own firm’s work hard enough to earn a decent living (cover their opportunity cost) but don’t really push themselves further, in that they make enough profit that they are happy to relax for the rest of the time.
• It also occurs if the owner of a firm is not the one who runs it