3.2 Business Objectives Flashcards
What does Neo-classical economics assume a firms main objective is?
Assumes that the interests of owners or shareholders are the most important and therefore the goal of firms is to profit maximise in the short run, in order to maximise owners’ returns
What point do firms produce at to short run profit maximise?
MC=MR
Why did William Baumol think firms may aim to revenue maximise?
● He suggested managers are most interested in their level of revenue as this is what their salary depended on
● Even when their salary is not directly connected to sales revenue, they knew that a growth in revenue was always likely to be a positive for the business. It increases their prestige and is used as a justification to shareholders for managerial rewards
● A fall in revenue would be negative as it would not only reduce their salary but could signal the start of a downward spiral for the company. It could lead to a fall in staff and financial institutions may be worried and less willing to lend money.
● As a result, many firms may aim to revenue maximise as long as they provide some profit for the owners
Who suggested that managers are most interested in their level of revenue since this is what their salary depended on?
William Baumol
What point do firms produce at to revenue maximise
MR=0
Why might a firm aim for sales maximisation? Who suggested this?
● Robin Marris suggested that managers aim to maximise the growth of their company above any other objective because their salary may be linked to the size of the company
● It’s ofteneasier for people to judge the level of growth achieved rather than the level of profit. This will increase the prestige of the business.
● Size is often linked to security as it is believed large firms can survive rough periods much easier and are less likely to get into financial trouble overnight.
● Growth will also increase market share, and may push other firms out of business. It will enable a firm to have more market power and more power over prices.
● This tends to be a short term strategy, and in the long term firms are more likely to profit maximise.
What point do firms produce at for sales maximisation?
AC=AR
What is a problem with both sales maximisation and revenue maximisation?
It necessitates a fall in price, which other firms may copy and so there may be no or little increase in revenue or sales: this is important in oligopoly. They also bring lower profits
What does it mean for managers to follow the objective of profit satisficing?
● They will make enough profit to keep owners happy whilst following other objectives and not profit maximising
● These other objectives are likely to be their own benefits, e.g. they may increase their own salaries which increases costs and decreases profit
The amount of profit needed will change year on year and will depend on the level of profit made by other firms: if everyone else is making a loss, and the firm only manages normal profit then this will be good enough for shareholders but if other firms are making huge profits, shareholders too will expect huge profits
What is managerial utility maximisation? Who came up with the theory?
● Oliver Williamson said that managers will make decisions to maximise their own satisfaction
● This will be dependent on their salary, the number of staff they control, their power over decision making and other benefits they receive
What does it mean for a firm to aim for marginal cost pricing/allocative efficiency and why might they do this?
Some firms, particularly nationalised industries, aim to maximise social welfare. This will be done by producing where the value society places the good is equal to the extra cost of producing the good, i.e. MC=AR. This achieves allocative efficiency
