5.2 The objectives of firms Flashcards
what is the traditional economic theory of the objective of a firm?
to profit maximise, profit maximisation
what is the condition for/ how do firms achieve profit maximisation?
MR=MC, marginal revenue is equal to marginal cost
(universal condition for all market structures btw)
why are the advantages of profit maximisation?
Re-investment back into the business e.g. by improving capital. (make more profit)
to pay greater dividends to share holds (owners of company) to reward for financing the business
allow for lower costs as profit is total revenue - total cost so business might keep costs low in order to keep more revenue , which can be passed on to consumer’s via lower prices which benefits producer as well as they can achieve higher market shares.
reward entrepreneurship, reward for risk taking activity when business starts
why does profit maximisation take place at MR=MC
this is because when MR>MC profit will be able to rise when output increases
and when MR<MC profits will only be able to rise if output decreases
essentially where no more profit can be made by producing an extra unit
why may a business decide that their objective is not to profit maximise?
they may not know their MR=MC making it difficult (impossible)
to avoid scrutiny by regulators/ competition authorities may investigate and outcomes are anti business e.g. force business to improve prices, or higher cots of production by requiring to use environmentally friendly production techniques
key stakeholders harmed ( manger and shareholders may have differnet objectives e.g. manager may try to maximise their career prospects), but can be fixed with profit related pay.
other objectives may be more appropriate
what is profit satificing?
where a business sacrifices profit to satisfy as many key stakeholders as possible
what combination of words is satisfice
sacrifice and satisfy
what is a stakeholder
anyone who has an interest in how a certain business is performing
name some key stakeholders and how they are effected when a firms main objective is to profit maximise?
shareholders- happy with profit max
managers- higher bonus and incomes
consumers- could suffer, due to excess prices
workers- wages may be low
government- wouldn’t like high prices/low wages
environmental groups- pollution or resource may increase to cut costs
what is a problem for a business if they harm key stakeholders?
consumers- suffer from bad reputation
workers- could strike
government- can investigate, anti business
environmental groups - protest, reputation big in the modern world.
where does revenue maximisation occur ?
where marginal revenue is equal to 0
why would a company want revenue maximisation to be its key objective?
economies of scale benefit, as rev max quantity produced is greater than profit max quantity produced so get greater growth, lower average costs and lower prices for consumers
predatory pricing, rev max pricing is lower than profit max firms price. so the firm can undercut its rival to drive out competitors from the market
principle agent problem, where their is a divorce between ownership and control, managers may decide to revenue max to gain leverage upon shareholders to earn greater perks for their job as it’s easier
what is sales/ growth maximisation
where a business wants to become as large as they possibly can without making a loss, this occurs at break even where average cost = average revenue
why would a business want to sales maximise?
economies of scale
limit pricing, taking away incentive for new firms to enter the market, limiting competition (illegal)
principle agent problem, managers may use sales as leverage
flood the market, consumer become aware of your production developing loyalty and then changing e.g. Netflix, Spotify have used this
what is survival objective
short run objective if entering a hyper competitive market, just to spread brand awareness, then they can change
