5.2 The Objectives Of Firms Flashcards
Total profit?
Total revenue-total cost
Total cost is written as?
TC
Total revenue is written as?
TR
What does profit maximisation require?
A firm produces the level of output at which TR-TC is maximised whatever the market structure the firm produced and sells an output
When would a firm have no incentive to change its level of output?
When it is producing and selling the output yielding the biggest profit
What is the condition for profit maximisation?
Marginal cost=marginal revenue
What is marginal revenue?
Revenue from the last unit sold
What is marginal cost?
Total cost of last unit in full during production
When are a firms profits maximised
When marginal costs=marginal revenue
What happens when marginal revenue> marginal cost
Profit rises when output increases
What happens when marginal revenue< marginal cost?
Profits rise when output is reduced
When MC> MR or MC<MR the firm?
Fails to max,it’s profit
Does MC=MR for profit maximisation occur for all markets or just specific ones
It occurs for all markets
(Imperfect, monopoly, perfect etc) all of them
In a firm what is the role of the entrepreneur?
Risk-taker and the decision-maker
Decided when,what,how,where to produce
What is the divorce for ownership control?
The owners who control the firm(mangers) are different groups with different directives
When does the divorce for ownership control usually occur?
In large buisnuess
What are management decisions made by?
Executive directors
Who are executive directors?
Part of the company’s corporate board and employed by the company and other managers(who they in turn employ)
What could happen to executive directors in a public company?
Could technically be voted out if there if poor performance (failure to maximise profit) by the shareholders although this is very rare
What is the most important problem resulting from the divorce of ownership and control?
The possibility that the managers and directors will pursue their own agenda which is not in the interest of the shareholders as a body
What is the principal agent or agency problem?
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)
What does the principal agent problem stem from
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
When do conflicts between agents and principals arrive?
When the incentives which affect their behaviour is not the same
Why is the incentive for an agent somewhat destroyed?
The agent had the task from the principal but doesn’t get the benefit for their actions if they were working alone
Why can do agents take on excessive risks in a business?
Will get the benefits if it works but not the costs if it fails
When does a moral hazard occur?
When one person takes more risks because someone els has agreed to take the burden of those risks
What are the two reasons why agents can get away with not acting in the best interest of the principal?
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
What methods can be used to realign the incentives facing the shareholders and executives.
Profit related pay
Paying managers partly by giving company shares
What counteracts the profit maximisation?
Good customer service and quality of product (reliability and good-quality)
What is possible business objectives rather than profit maximisation?
Growth maximisation and survival as business objectives
Growth maximisation:
-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
When would firms especially look to increase sales revenue?
When managerial pay is linked to revenue rather than profit
Why would firms want sales revenue maximisation?
-when managerial pay is linked to sales revenue
When does sales revenue maximisation occur?
When marginal revenue= marginal cost
What is the difference between profit maximisation and revenue maximisation?
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
What is satisfying?
Achieving a satisfactory outcome rather than the best possible outcome
What are the key things workers want?
-higher wages
-improved working conditions
-job security
What do management do to try and resolve a conflict of different goals within a company?
Replace profit maximisation with satisfying
When is satisfying more likely to occur?
In monopolies and imperfectly competitive markets because there are barriers to entry and exit
digram for a firm maximising outputs
Diagram for profit maximisation in a firm?
Axis?
Profit maximisation?
Axis: x: rev and cost, y:output
Profit maximisation mr=mc
When MR>MC, profits rise when…(perfect competition)
Output increases
When MC>MR, profits rise when…(pink bit)(perfect competition)
Output decreases
What does it mean when a firms mr is horizontal?
Perfect competition?
Diagram for profit maximisation and revenue maximisation when a firms AR curve slopes down diagram
Where would profit maximisation be?
Point x
Where would sales maximisation be?
Point Z
