Alternative business objectives

Question 1

what are the different reasons for alternative business objectives

Answer 1

Managerial objectives
- revenue or sales growth instead of profit max, in order to achieve more profit in the long run, having knocked out competitors by gaining a greater market share
- achieves a satisfactory profit for shareholders

Information failures
- lack of accurate information on marginal cost and revenue

Small businesses
- life-style businesses for owners - want to enjoy the businesses rather than make obsene profits, and might want to be charitable

Charities
- non-profit
- all profits go to a certain cause

state-owned corporations
- likely to have a range of different objectives, including political and social

Question 2

where does sales maximisation occur on a cost revenue diagram?

Answer 2

ATC = AR
- when a business sells as much as possible without making a loss
- at this output, firm is making normal profits

Question 3

why might a firm sales maximise?

Answer 3

• easier for people to judge the growth of the firm than the profit that a firm has made
• large firms are deemed to be more secure as they have the resources to survive through economic downturns, therefore this might make them more creditworthy, and more likely to achieve lower interest rates from banks
• growth will increase market share and may push other firms out of business

Question 4

what is sales revenue maximisation (revenue)

Answer 4

MR = 0
- the level of output where the greatest amount of revenue is received. Beyond this point, any additional unit of output takes away from total revenue

Question 5

why might a firm sales revenue maximise (revenue)
- give an example

Answer 5

• managers interested in their level of revenue since this is what their salary depends on
• firms may wish to maximise revenue in order to deter the entry of rivals into the industry - keep high market share
• means they can dominate the market
• Amazon massively increased its revenue even though this didn’t correlate with an increase in profits, because it wanted to gain a bigger market share

Question 6

what is a conflict which may arise between managers and share holders

Answer 6

They have different interests:

• managers are concerned about their salaries, the number of people they have working under them, and fringe benefits. Their cash bonuses are often related to the amount of revenue that the firm makes, therefore they want to revenue maximise
• shareholders are interested in the profits that the firm makes, because this will mean that they get a bigger return on the investment they have made into the company. They want to profit maximise and can sometimes choose to vote their managers out, if they don’t meet their demands
• therefore, managers will profit satisfice - they will make just enough profit so that shareholders are happy
• therefore the level of output will be somewhere between profit max and sales max