5. Market Structures - Firm Objectives Flashcards
What is the primary objective of all firms and where does it occur?
Profit Maximisation and this occurs where MR=MC
What is managerial utility maximisation and how does it occur?
This is when a difference emerges between the aims of a businesses owners and the managers - this occurs when owners are not well informed so managers have freedom to make decisions - they may then aim to;increase their salaryincrease the no. of employees (feeling powerful)increase investment (feeling powerful)earn extra benefits (e.g company car)
What are two other potential objectives of firms/managers and why?
Sale Maximisation - where MR = 0 - bc more likely to be lent to by financial institutions & salaries may be linked to salesGrowth Maximisation - highest output where AR=AC - bc large firms are less vulnerable to takeovers & salaries may be linked to the size of the firm
What is satisficing and why do firms do it?
This is when firms compromises to create a satisfactory conclusion for all the relevant parties it deals with rather than ignoring one and maximising another
What is the principal-agent problem?
This is when owners of a business are unsure whether the managers they’ve employed are working towards their interests or their own - how can you get employees to act in your interest rather than their own?
What are the potential ways of dealing with the principal-agent problem?
Employee share ownership schemes - if employees have a stake in the ownership of the business their interests will become closer to ownersIncreased shareholder activism - if owners become more proactive and aware of ongoings they can pressure managers appropriately Performance related pay for employees
Give an example of a successful way of dealing with the principal agent problem?
Tesco 2009 - executives came under pressure their annual meeting for bonus pay and treatment of agency workers
What are the two other aims of firms/organizations - typically associated with state run bodies?
Solving market failureHelp to improve the quality of life for people
What is the final possible objective of a firm - typically associated with small family run businesses etc.?
Subsistance/Survival
What are the 2 different types of businesses?
Public - owned by gov. Private - owned by individuals
What are the 4 subdivisions of private businesses?
- Sole Trader - small, owner usually = manager2. Partnerships - 2-20 ppl usually professionals3. Private Limited Companies - any size - owned by shareholders - privately sold share - little sep. between ownership & control4. Public Limited Companies - owned by shareholders - appoint managers who make decisions - shares sold in stock market - may get divorce in own. & control
What do public businesses tend to aim for?
Address market failuresProvide good servicesGet tax payers value for money
What do private limited companies aim for/result in?
They tend to profit maximiseThey’re easier & less expensive to finance and expand but often result in a divorce of ownership & control
Why may a business fail to profit maximise?
Imperfect InformationMulti-product businesses - for firms with multiple products the idea there is one neat profit max. point is incorrect
What is a social enterprise?
A business that has social objectives whose profits are reinvested for that purpose rather than being driven by creating profits for shareholder - e.g. Waitrose are environmentally friendly - reinvest money in local produce
