3.2.1 - Business Objectives

Question 1

What Are All The Business Objectives?
(4 Points)

Answer 1

~ Profit maximisation.

~ Revenue maximisation.

~ Sales maximisation.

~ Profit satisficing.

Question 2

Why Would Firms Profit Maximise?

Answer 2

~ Re-investment into the business. E.g. New capital and technology, research and innovation.

~ Pay greater dividends for shareholders.

~ Allow for lower costs, so that they can keep their profits high.

~ Lower prices for consumers, passed on from lower costs.

~ Reward entrepreneurship, rewarding them for risk taking.

Question 3

What Point Does Profit Maximisation Occur At?

Answer 3

MC = MR.

Question 4

Why Does Profit Maximisation Occur Where MC = MR?
(2 Points)

Answer 4

~ Any quantity to the right of MC = MR cannot be maximising profit as costs are always higher than revenue.

~ For quantities to the left of MC = MR, when MR is greater than MC the next unit will always generate more profit up until MC = MR.

Question 5

Why Would Some Business Chose Not To Profit Maximise?
(4 Points)

Answer 5

~ They have no knowledge of their MC or MR.

~ Avoid scrutiny and investigation, from the CMA as they may be generating high amounts of profit which may be a cause for concern for the bodies, intervention from these bodies are very anti the interest of business.

~ Key stakeholders could be harmed if a business goes too hard with their profit max.

~ Other objectives may be more appropriate to the business.

Question 6

What Is Profit Satisficing?

Answer 6

When a business sacrifices profit to satisfy as many key stakeholders as possible.

Question 7

What Shareholders Would Loose Out From Profit Maximisation & What Rather The Business Satisfies Profit?
(4 Points)

Answer 7

~ Consumers could suffer from profit max, if excess prices are being charged.

~ Workers / TU could suffer if wages are low, as a result of cost cutting to maximise profits.

~ Government may not like profit max if consumers and workers are being exploited.

~ Environmental groups may not like profit max if the environment begins to degrade due to cost cutting from business.

Question 8

What Point Does Revenue Maximisation Occur At?

Answer 8

MR = 0.

Question 9

Why Would Firms Revenue Maximise?
(3 Points)

Answer 9

~ EOS benefits, as the RMQ is greater than the PMQ which enables greater growth, greater EOS, lower AC and lower prices for consumers.

~ For predatory pricing purposes, as the RMP is lower than the PMP so firms can use this tactic to drive out competitors whilst sacrificing profits.

~ Due to the principle agent problem, as managers can use revenue max for perks in the job.

Question 10

What Is Sales Maximisation?

Answer 10

A business wants to become as large as they possibly can be without making a loss.

Question 11

What Point Does Sales Maximisation Occur At?
(2 Points)

Answer 11

~ AC = AR.

~ Breakeven output and normal profit.

Question 12

Why Would A Business Want To Sales Maximise?
(4 Points)

Answer 12

~ EOS.

~ Ability to price at the limit price, taking away the incentive for new firms to enter the market.

~ Principle agent problem, as manager might use growth or sales as leverage to go for greater perks in their jobs as they approach shareholders.

~ Flood the market, causing many consumers to become aware of your product, leads to them developing loyalty towards the business and down the line the business can change their objective towards a profit max objective.