3.2 Business Objectives Flashcards
Why should firms profit maximize?
Neoclassical economists believe that shareholders and owners are the most important stakeholders in a firm and their utility should be maximized through dividends and this can only be done by increasing profits
Short term profit maximization is also useful for generating funds for investment
At what point does profit maximization take place?
MC=MR
Why should firms revenue maximise?
William Baumol believed that managers are most interested in maximizing their firms revenue as their salaries are linked to this
Even when salaries are not directly linked, they are more likely to receive managerial rewards at this point
When a firms revenue starts falling it signals the decline of a company, which can reduce worker morale so to avoid this firms should revenue max
Still some degree of profit is made so shareholders are still satisfied
At what point does revenue maximization occur?
MR=0
Why do firms sales maximise?
Robin Marris believed that managers salaries are linked to the sales they are able to make
It also is easier to judge the level of sales it makes compared to profit or revenue
More sales is also linked to greater security in the industry as they will haver more financial asssets
In the short term it is deemed superior for dominating market share
It is good for dominating markets and stopping new firms from entering
At what point does sales max occur?
AC=AR
What is the problem with revenue and sales max?
It facilitates a fall in price so by reducing price, other firms may follow causing no sales or revenue increase and just a decrease in supernormal profit
What is satisficing?
This is when firms do not profit maximise but produce enough profit to keep shareholders and investors satisfied
