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A Level Economics: Microeconomics > 5.2 The Objectives Of Firms > Flashcards

5.2 The Objectives Of Firms Flashcards

1
Q

Total profit?

A

Total revenue-total cost

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2
Q

Total cost is written as?

A

TC

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3
Q

Total revenue is written as?

A

TR

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4
Q

What does profit maximisation require?

A

A firm produces the level of output at which TR-TC is maximised whatever the market structure the firm produced and sells an output

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5
Q

When would a firm have no incentive to change its level of output?

A

When it is producing and selling the output yielding the biggest profit

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6
Q

What is the condition for profit maximisation?

A

Marginal cost=marginal revenue

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7
Q

What is marginal revenue?

A

Revenue from the last unit sold

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8
Q

What is marginal cost?

A

Total cost of last unit in full during production

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9
Q

When are a firms profits maximised

A

When marginal costs=marginal revenue

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10
Q

What happens when marginal revenue> marginal cost

A

Profit rises when output increases

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11
Q

What happens when marginal revenue< marginal cost?

A

Profits rise when output is reduced

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12
Q

When MC> MR or MC<MR the firm?

A

Fails to max,it’s profit

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13
Q

Does MC=MR for profit maximisation occur for all markets or just specific ones

A

It occurs for all markets

(Imperfect, monopoly, perfect etc) all of them

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14
Q

In a firm what is the role of the entrepreneur?

A

Risk-taker and the decision-maker

Decided when,what,how,where to produce

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15
Q

What is the divorce for ownership control?

A

The owners who control the firm(mangers) are different groups with different directives

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16
Q

When does the divorce for ownership control usually occur?

A

In large buisnuess

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17
Q

What are management decisions made by?

A

Executive directors

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18
Q

Who are executive directors?

A

Part of the company’s corporate board and employed by the company and other managers(who they in turn employ)

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19
Q

What could happen to executive directors in a public company?

A

Could technically be voted out if there if poor performance (failure to maximise profit) by the shareholders although this is very rare

20
Q

What is the most important problem resulting from the divorce of ownership and control?

A

The possibility that the managers and directors will pursue their own agenda which is not in the interest of the shareholders as a body

21
Q

What is the principal agent or agency problem?

A

The possibility that the managers and directors will pursue their own agenda which is not in the interest of the shareholders as a body

(Mangers and directors being the agents)
(Shareholders are the principals)

22
Q

What does the principal agent problem stem from

A

Shareholders own the company and want profit maximisation

The managers and executives have a monopoly of technical knowledge about the actual running of the company, they will focus on maximising their career prospects or creature-comforts instead of profit maximisation

23
Q

When do conflicts between agents and principals arrive?

A

When the incentives which affect their behaviour is not the same

24
Q

Why is the incentive for an agent somewhat destroyed?

A

The agent had the task from the principal but doesn’t get the benefit for their actions if they were working alone

25
Q

Why can do agents take on excessive risks in a business?

A

Will get the benefits if it works but not the costs if it fails

26
Q

When does a moral hazard occur?

A

When one person takes more risks because someone els has agreed to take the burden of those risks

27
Q

What are the two reasons why agents can get away with not acting in the best interest of the principal?

A

1.cost to punish or Sack is too high relative to what the principal would enjoy
2. Agents knows more than principal about the business(hard to see if they are acting in their best interest

28
Q

What methods can be used to realign the incentives facing the shareholders and executives.

A

Profit related pay
Paying managers partly by giving company shares

29
Q

What counteracts the profit maximisation?

A

Good customer service and quality of product (reliability and good-quality)

30
Q

What is possible business objectives rather than profit maximisation?

A

Growth maximisation and survival as business objectives

31
Q

Growth maximisation:

A

-growth with achieving economies of scale and having cost reductions
-growth can achieve monopoly power which can knock smaller firms out a market
-increase in political influence

32
Q

When would firms especially look to increase sales revenue?

A

When managerial pay is linked to revenue rather than profit

33
Q

Why would firms want sales revenue maximisation?

A

-when managerial pay is linked to sales revenue

34
Q

When does sales revenue maximisation occur?

A

When marginal revenue= marginal cost

35
Q

What is the difference between profit maximisation and revenue maximisation?

A

Profit maximisation=occurs a the level of output which the difference between total sales (TR)and total cost of production(TC) is greatest

-revenue maximisation is when marginal costs= marginal revenue

36
Q

What is satisfying?

A

Achieving a satisfactory outcome rather than the best possible outcome

37
Q

What are the key things workers want?

A

-higher wages
-improved working conditions
-job security

38
Q

What do management do to try and resolve a conflict of different goals within a company?

A

Replace profit maximisation with satisfying

39
Q

When is satisfying more likely to occur?

A

In monopolies and imperfectly competitive markets because there are barriers to entry and exit

40
Q

digram for a firm maximising outputs

A
41
Q

Diagram for profit maximisation in a firm?
Axis?
Profit maximisation?

A

Axis: x: rev and cost, y:output
Profit maximisation mr=mc

42
Q

When MR>MC, profits rise when…(perfect competition)

A

Output increases

43
Q

When MC>MR, profits rise when…(pink bit)(perfect competition)

A

Output decreases

44
Q

What does it mean when a firms mr is horizontal?

A

Perfect competition?

45
Q

Diagram for profit maximisation and revenue maximisation when a firms AR curve slopes down diagram

A
46
Q

Where would profit maximisation be?

A

Point x

47
Q

Where would sales maximisation be?

A

Point Z

A Level Economics: Microeconomics (56 decks)

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