3.2.1 - business objectives Flashcards
what is profit max
● 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. It is for this reason that we assume that firms profit maximisation for all market structures in unit 4.
● By short-run profit maximising, firms can also generate funds for investment and to help them survive a slowdown during a recession.
For example, Apple and pharmaceutical companies are likely to profit maximise since they need the money to reinvest.
what are the conditions for profit max
In order to short run maximise, firms produce where MC=MR. If they produce less than this, then producing more will increase profit since MR would be higher than MC so they’re making more in revenue than it costs to produce the good and so producing more would increase profit. If they produce more than this, they would be making a loss on the goods produced above the profit maximising point and so they should decrease production. The diagram shows that the firm will produce at P1Q1: the output is determined by where MC=MR and the price at this output is determined by the AR curve
what is revenue max
● 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.
● As a result, many firms may aim to revenue maximise as long as they provide some profit for the owners.
what are the conditions for revenue max
To revenue maximise, firms would produce where MR=0, since if marginal revenue is above 0 producing more would increase revenue. This means they produce Q2P2, whilst profit maximisationwouldproduceatQ1P1..Priceswouldbelowerthanwhentheyareprofit maximising since they are producing more.
what is sales max
● 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.
● 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.
what are the conditions for sales max
In order to sales maximise, the firm will want to get the highest level of sales possible without making a loss. They will want to ensure sufficient returns to keep the owners happy, so will aim for normal profits. As a result, they produce where AC=AR at P2Q2. Prices are lower and output is higher than they would be under profit maximisation.
