3.2 Business objectives Flashcards
What are the two ways in which profit maximisation can be viewed?
The output at which the difference between the total revenue (TR) and total cost (TC) is greatest.
The point at which marginal cost (MC) = marginal revenue (MR)
Explain the reasoning behind profit maximisation occurring at MC=MR:
This is the point where the price received for the production of an extra good is the same as the cost. Marginal profit is zero.
Producing at an output either side of this level would mean less profit is being made. It is therefore logical for firms to produce at where MC=MR.
What are the two ways in which revenue maximisation can be viewed?
The output at which TR is a maximum.
The point at which MR=0.
Explain 2 circumstances where revenue maximisation is a rational objective for a firm:
If a firm needs to dispose of stock, costs are less relevant. For example, supermarkets reduce items that are close to their sell-by-date because they will soon be unable to sell them.
If a firm is being taken over by another, often the value of a firm is considered by looking at revenue. Therefore, revenue maximisation my be used in order to increase sale value.
Explain how the principal agent problem can occur when operating at revenue maximisation:
Owner’s of a business may want to operate at profit maximisation, whereas managers may aim for revenue maximisation due to revenue related bonuses.
What are the two ways in which sales maximisation can be viewed?
The output at which TC=TR
The point at which average cost (AC) = average revenue (AR)
Note: this is where a firm sells as much as possible with the constraint of making normal profit
Explain 2 circumstances where sales maximisation is a rational objective for a firm:
To increase market share and eliminate competitors by cutting prices.
To avoid the attention of the competition authorities.
What is profit satisficing?
Where a firm makes enough profit to keep shareholders happy, after which managers can pursue other objectives.
I doesn’t involve the idea of maximisation and rather focusses on maintaining objectives simultaneously, e.g. profit, market share, revenue and environmental objectives.
Explain 2 circumstances where profit satisficing is a rational objective for a firm:
Firms may wish to keep profits low to avoid being taken over by other firms.
There is an opportunity cost for mangers and workers. E.g. is spending the afternoon playing golf more important than selling a few more items?
Draw a diagram showing ‘profit maximisation’, ‘revenue maximisation’, ‘sales maximisation’ and ‘profit satisficing’:
