6EC03 - Motives Of The Firm

Question 0

What is profit maximisation?

Answer 0

MC=MR
Marginal profit = 0
MC must be rising
Supernormal profits at greatest

Question 1

What are the objectives of a firm?

Answer 1

Profit maximisation
Revenue maximisation
Sales maximisation
Satisficing

Question 2

Can profit be made by increasing or decreasing output when MC=MR?

Answer 2

No as the marginal profit is zero

Question 3

What is revenue maximisation?

Answer 3

Firms make as much revenue as possible,
Sell until last unit sold adds nothing to TR as next unit sold will reduce revenue,
MR=0

Question 4

Why might a firm choose to operate at revenue maximisation point?

Answer 4

1) Firm has to dispose of all its stock, then costs are not relevant e.g flower-seller
2) Business owned & managed by different people e.g owners shareholders maximise profit & managers paid on how much sold i.e bonuses
3) Firm takeover: valued in basis of revenue to ensure sale price as high as possible

Question 5

What is sales maximisation?

Answer 5

Output maximisation,
Firm sells as much as it can without making a loss,
Selling the most it can, given that the firm must make normal profits
AC=AR

Question 6

Why do firms sales maximise?

Answer 6

1) Effort to gain market share
2) Drive out rival in industry as high levels of profitability might attract firms so cutting prices and selling more, new entry is prevented
3) Prices are lower than under perfect competition & output is higher
4) Avoid attention of competition authorities

Question 7

What is satisficing?

Answer 7

Making enough profit to keep stakeholders happy allowing other motives to then be pursued,
P=MC

Question 8

Where does the government want firms to operate at?

Answer 8

Allocative efficiency,
P=MC,
Cost of production & demands of consumers taken into account to maximise welfare: welfare maximisation

Question 9

What are stakeholders?

Answer 9

People who have a vested interest in the firm e.g:

• shareholders
• employees
• managers
• customers & suppliers
• government & the trade unions

Question 10

What is the aim of pricing strategies?

Answer 10

To gain market share,
Increase profitability in LR while sacrificing SR profits,
Improve sales

Question 11

List 5 pricing strategies.

Answer 11

1) Predatory pricing
2) Limit pricing
3) Cost-plus pricing
4) Price discrimination
5) Discount pricing

Question 12

What is predatory pricing?

Answer 12

Pricing below costs to drive out other firms,

Anti-competitive practice & can lead to fines by competition authorities

Question 13

What is the SR & LR impact of predatory & limit pricing?

Answer 13

SR: firms make a loss, benefits consumer
LR: as other firms leave & firm gains monopoly power; prices are raised to higher levels than would have been with competition, reducing consumer surplus as well as consumer choice

Question 14

What is limit pricing?

Answer 14

Pricing at a level low enough to discourage entry of new firms,
Ensuring price of good below that which a firm entering industry would be able to sustain,
Exploits economies of scale,
Not illegal in UK

Question 15

What is cost-plus pricing?

Answer 15

Firms fix price for their products by adding a fixed percentage profit margin to LR AC of production

Question 16

What is discount pricing?

Answer 16

Have good practical rationale,
Lead to increased consumer loyalty thereby increasing LR profits,
e.g buy-one-get-one-free

Question 17

What is the aim of non-price strategies?

Answer 17

Increase demand for the good being sold,
Reduce the PED by reducing availability of substitutes,
All without changing price,
So shift AR (demand) curve to right or prevent it from falling as other firms try to increase their market share

Question 18

List 5 examples of non-pricing strategies.

Answer 18

1) Advertising
2) Branding
3) Packaging
4) After care/ Customer service
5) Product development