Business Objectives Flashcards
What are a businesses main objectives?
Profit Maximization Sales Volume Maximization Revenue Maximization Profit Satisficing
What is the profit maximization level of output?
The output level where MC=MR.
What is the revenue maximization level of output?
The output level where MR=0.
What is the sales volume maximization level of output?
This occurs where AR=AC or TR=TC.
Why would a firm want to pursue the different objectives listed above?
A firm will want to maximize its profits to benefit shareholders and increase their dividend returns which is why a lot of risks is involved with the investment.
Why will a firm want to maximize its revenue?
A firm will seek to maximize its revenue to benefit managers and other senior personnel as they will feel more rewarded to work with the company. Furthermore, revenue maximization will lead to increasing bonus payments which occurs due to the principle agent problem of divorce between ownership and control.
Why do firms profit satisfice?
This occurs as owners share the motive of maximizing profits whereas managers want to achieve rewards like a sense of responsibility, achievements, creative decision making. This occurs due to the principal agent problem. However, managers have to make a satisfactory level of profit to ensure that shareholders will remain with the company throughout.
