3A: Business Objectives Flashcards
What is ‘Profit Maximization’
The short or long run process by which a firm determines the price and output level that returns the greatest profit.
What are the benefits of profit maximization?
Higher salaries for employees, Higher dividends for shareholders, reducing risk of a hostile takeover. Encourages efficiency and cost cutting. Enables more resources for investment in future projects, ensuring long term success.
What is ‘Sales Maximization’
A goal which occurs when a firm sells as much as possible without making a loss in order to increase market share.
Why would a firm aim to maximize sales?
Increased market share, leading to increased monopoly power, enabling prices to be put up for higher profits in the long run
Managers prefer to work for bigger companies , as it tends to lead to greater prestige and higher salaries.
Higher sales increases influence in society.
How do social, community and environmental concerns factor into business objectives
A firm may incur extra expenses to choose products which don’t harm the environment, or choose products not tested on animals. Has proved a good marketing strategy for firms such as the Body Shop. Some firms may highlights their social concerns but are mainly concerned about profit maximization.
What is ‘Profit Satisficing’
In many firms there is separation of ownership and control. Shareholders may want to maximize profits but managers do not have the same incentive and therefore create a minimum level to appease shareholders.
How is ‘Profit Satisficing’ overcome
The firm can give workers and managers performance related pay and share options as an incentive and could overcome the x-inefficiency of workers without incentives.
On which points do different objectives of firms fall?
Profit maximization = the output where MR = MC
Revenue maximization = the output where MR = 0
Marginal cost pricing = P = MC (Allocative efficiency)
Sales maximization = AR = AC the max sales without making a loss
