3.2.1 - Business Objectives Flashcards
When does revenue maximisation occur
- MR = 0
Difference between profit and revenue maximisation
Revenue maximisation sell more output and at a lower price to sell the extra output
Where does sales maximisation occur
AC=AR
What are managerial utility maximisation
Where managers develop their own objectives to maximise utility through fringe benefits, increased salaries etc. this will cut into profits
What is satisficing
Firms
What objective do owners and shareholders prioritise
Neo-classical economics 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.
Why else do owners want to short run profit maximise
● By short-run profit maximising, firms can also generate funds for investment and to help them survive a slowdown during a recession.
What is Amazon’s objective
Amazon follow an objective of revenue maximisation, with revenue nearing £120bn in 2015 but profit staying relatively stable. Their aim is to dominate the market.
What did William baumol argue about revenue maximisation
● William Baumol suggested managers are most interested in their level of revenue since 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.
What did robin Maris argue
Robin Marris suggested that managers aim to maximise the growth of their company above any other objective. This is because their salary may be linked to the size of the company
Reasons for sales maximisation
● It is often easier 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.
Downside of sales/revenue maximisation
The problem with both sales maximisation and revenue maximisation is that 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.
Why does satisficing occur
Due to the principal-agent problem, owners and directors will have different goals. Directors will want to maximise their own benefits but will need to make a certain amount of profit in order to keep their jobs, receive benefits and avoid criticism from shareholders/the press
Explain further why managers are likely 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, for example they may increase their own salaries which increases costs and therefore decreases profit.
What is managerial utility maximisation
Oliver Williamson said that managers will make decisions to maximise their own satisfaction dependent on their salary, the number of staff they control, the power over decision making and other benefits they receive (fringe benefits)
