3.2) business objectives

Question 1

Who do the objectives and decisions of firms depend on?

Answer 1

• managers
• shareholders
• directors
• workers

Question 2

What are the four possible business objectives?

Answer 2

• profit maximisation
• revenue maximisation
• sales maximisation
• profit satisficing

Question 3

What is profit maximisation? And where to find this on a graph?

Answer 3

• Profit maximisation is the point where MC = MR - where profit can no longer increase, hence maximised
• All firms are assumed to be profit maximisers
• to find price at MC = MR, slide up to AR
• to find cost, slide up to AC

Question 4

What is revenue maximisation? And how can this be identified on a graph?

Answer 4

• When MR = 0 - no more additional profit to be gained
• When a firm is aiming to maximise revenue, they will keep increasing output past the point of MC = MR, as long as adding more output leads to greater revenue
• Firms often profit maximise to drive out competition (by exploiting EOS) so that they can increase their market share and increase recognition which will increase profits in the long run
• to find price, when MR = 0, slide up to AR

Question 5

What is sales maximisation?

Answer 5

• When AR = AC
• Highest level of output a firm can sustain in the long run without making a loss - make normal profits
• May be done to sell remaining stock without making a loss per unit
• e.g. PlayStation, they sell their PS5 for a normal profit so as many people buy it as possible and then make supernormal profits when selling their games for the PS5 at higher prices.

Question 6

Why is maximising profit only an objective for the long run?

Answer 6

• Maximising profit in the long run = sacrificing profits in the short run
• Instead, a firm may try to maximise sales or revenue so that they can gain market share or monopoly powers so it can achieve supernormal profits in the long run OR high sales will make it easier for them to borrow money
• a firm may also be willing to run at a loss in the short run until the brand becomes recognised after a while or when they can reduce costs at a higher production level

Question 7

What are the business objectives of ‘not-for-profit’ and other organisations?

Answer 7

• main aim is to bring good to the public hence they pay out profit to the owners
• others may focus on making high quality products to gain loyal customers at the expense of maxxing profit in the short run
• CSR - firms operating in way that benefits society as well as trying to make supernormal profits: environment, supporting local businesses, paying above minimum wage. CSR policies can help increase profits by encouraging customers to buy from them

Question 8

What is satisficing?

Answer 8

• Means trying to do just enough to satisfy important stakeholders, instead of trying to maximise a quantity
• Often arises as a result of the principal-agent problem - conflicting objectives
• e.g. directors making ‘just enough’ profit to dtop shareholders from getting concerned and paying employees high enough wages that they don’t want to leave