3.2.1 Business Objectives

Question 1

What is profit maximisation

Answer 1

At an output level where marginal cost = marginal revenue (MR=MC)

The change in revenue from producing an extra unit of output = the change in cost from producing an extra unit

Question 2

What is revenue maximisation

Answer 2

At an output where marginal revenue = zero

Question 3

What is Sales maximisation

Answer 3

Supplying the largest output possible consistent with earning at least normal profits where AR = AC

Question 4

What is Satisficing behaviour

Answer 4

Involves the owner of a business (shareholder) setting minimum acceptable levels of achievement of either revenue or operating profits

Question 5

What would be managerial objectives

Answer 5

• Revenue or sales growth is often preferred instead of profit maximisation
• Achieve satisfactory profit/ return for shareholders

Question 6

How would information constraints affect a business

Answer 6

This can affect information on MC and revenues

Cost-plus pricing is a common tactic - marking up on average cost can work out elasticity

Question 7

What would objectives be for a small/start-up business

Answer 7

Small firms are ‘life-style businesses’ for their owners

Start up often target on rapid growth of users rather than profits

Question 8

How would profit maximisation be represented on a graph

Answer 8

The intersection between MC and MR

Question 9

What could be the benefits from maximising profits

Answer 9

1. Shareholders benefits from higher dividends
2. Employees may benefit if their pay is linked to the profitability of the business
3. Higher profits may lead to increased capital investment benefiting other businesses
4. Profits may be funneled into research and development, increasing efficiency
5. provides a safety net in hard times

Question 10

What are drawbacks from aiming to maximise profits

Answer 10

1. Higher prices for consumers - reducing real income
2. Higher profits may act as an incentive for new firms to enter the market
3. Only focusing on profit could make companies lose sight of the social aspect
4. quality could reduce

Question 11

Loss minimisation is the same as what

Answer 11

Profit maximisation

Question 12

How would you demonstrate price, output and profit being maximised on a diagram

Answer 12

Intersection between MC = MR = AC

Question 13

Why would a business want to focus on revenue maximisation

Answer 13

salaries and rewards for managers were closely linked to sales revenue - not profits

It may deter the profitable entry of new firms - rivals in the industry maintain market power

Question 14

total revenue is maximised at a price and output where…

Answer 14

marginal revenue = zero

Question 15

How would maximum revenue be presented on a diagram

Answer 15

Where MR=0

And profit maximisation is where MC=MR

Question 16

When MR is zero, this is what against the AR curve

How does this link to the elasticity

Answer 16

It is the half way point along the AR curve

This is the point where PED is unitary

Question 17

What is the sales maximising output?

Answer 17

Is where a business maximises output without making a loss

This is where AR = AC

At this output normal profits are made

Question 18

How would sales maximisation be represented on a diagram

Answer 18

Where Average revenue = Average Costs

Question 19

What is Satisficing

Answer 19

making the best economic choice from all available alternatives

generally concerned with keeping ‘a range of stakeholder happy’ by the business earning enough profit

this relies on a simpler cost-plus approach and is more concerned with increase sales revenue/market share instead of profit maximisation

Question 20

At what level does profit satisficing output occur

Answer 20

there is no unique profit satisficing output level

It can occur at any output between profit maximisation and sales maximisation

Question 21

What type of market would a business aim of market share be particularly predominant

Answer 21

In an Oligopolistic market, which is a market dominated by a handful of large businesses