Business Objectives

Question 1

1. Explain maximisation Objectives: profit

Answer 1

○ Profit:
□ Normal Profit:
◊ The minimum reward required keep entrepreneurs supplying their enterprise. It covers the opportunity cost of investing funds into the firm and not elsewhere
◊ Normal profit occurs when Total Revenue = Total costs
◊ Normal Profit is considered to be a cost, and is therefore included in the costs of production
□ Supernormal Profit:
◊ This is the profit above the normal profit
◊ This exceeds the opportunity cost of investing funds into the firm.
◊ Occurs when TR>TC

Question 2

Explain maximisation Objectives: Sales revenue

Answer 2

○ Sales Revenue Maximisation:
□ Revenue Maximisation occurs where MR = 0
□ In other words each extra unit sold generates no extra revenue

Question 3

Explain maximisation Objectives: Sales volume

Answer 3

○ Sales Volume Maximisation:
□ When firms aim to sell as much of their product as possible without making a loss
□ Non-Profit organisation work at this objective
□ Occurs when Average Costs (AC) = Average Revenue (AR)
□ Firms may do this in the short run to gain market share with their ultra-low prices, then up their prices in the long-run in order to earn supernormal profits

Question 4

Explain maximisation Objectives: Growth

Answer 4

Growth Maximisation:
□ Some firms wish to maximise their growth potential
□ This is so they can benefit from economies of scale.
□ This lowers their LRAC, making them more profitable
□ They might grow through:
} Expanding their product range
} Merging/acquisitioning firms
□ Larger firms are also able to benefit more from research and development as they can put more money in through their larger profits.
□ Which once again could increase their competitiveness and efficiency in the long run.
§ Increasing Market Share:
□ Some firms may wish to grow their market share as this will allow for better chances of surviving in the market
□ This is done through maximising their sales (AC=AR)
□ E.G. Kindles, amazon sold them at the lowest price possible at first to gain market share, made a loss in the short run, but with large market share, made a profit in the long run

Question 5

Explain maximisation Objectives: Utility

Answer 5

Utility Maximisation
□ For Consumers:
® This is when consumers aim to generate the maximum utility out of an economic decision
□ For Firms:
This is when firms aim to generate the maximum amount of profit
□ It is assumed that economic agents only work in their own interest.

Question 6

Explain Non-Maximising Objectives: Profit Satisficing

Answer 6

Profit Satisficing:
□ A firm is profit satisficing when it earns just enough profits to keep its shareholders happy
□ Shareholders want profits since they earn their dividends from them
□ However managers might choose different objectives as their rewards from larger profits are smaller compared to shareholders.
□ This means managers might choose to earn just enough profits to keep shareholders happy whilst also meeting their own objectives at the same time
□ This occurs where there is a divorce of ownership and control

Question 7

2. Explain Non-Maximising Objectives: Social Welfare

Answer 7

Social Welfare:
□ Social Welfare:
® Some firms will take responsibility for their consequences on the environment and therefore aim to maximise social welfare

Question 8

Explain Non-Maximising Objectives: Corporate Social Responsibility (CSR)

Answer 8

CSR:
® Some firms might try and perform more ethically, especially if they have a philanthropic owner

Question 9

Explain the Principal-Agent problem

Answer 9

3. The Principal Agent Problem:
   ○ The Principal Agent Problem:
   □ This can be related to the theory of asymmetric information:
   } This is when the agent (manager) makes decisions for the principal (CEO)
   } However, the agent will always be more inclined for their own interests, rather than those of the principal
   } E.G. Shareholders and managers have different interests and objectives, which might lead to conflict.
   } Managers might choose to make a personal gain such as a bonus compared to maximising the dividends of the shareholders
   } When an owner of a firm sells shares, they lose control over the decisions and objectives of the firm, however if the manager might require a higher wage, which is harder as their maybe limited resources, which could mean it is difficult to balance the two of dividends and managers wages.
   } When a manager sells some shares, shareholders gain more control

Question 10

4. Evaluate factors which influence the choice of objectives: The Kinked Demand Curve:

Answer 10

○ The Kinked demand curve illustrates the feature of price stability in an oligopoly:
It assumes firms have an asymmetric reaction to a price change by another firm
○ If the price increases from P1 to P2, then the other firms will not change their prices, and the firm that changed their price in the first place will lose a significant amount of market share as shown by Q1 to Q2.
○ If a firm lowers its price from P1 to P3, other firms will drop their prices to maintain market share, and in doing so, there wont be a massive increase in market share, as shown by Q1 to Q3, whilst also lowering its profit margin.
○ The first part of the AR curve is relatively price elastic, whereas the second part shows a relatively price inelastic curve
○ This is because the quantity demanded is more elastic in the first half as it is an increase in price, whereas inelastic in the second half as it is a lowering in price.

Question 11

Explain, the significance of interdependence and uncertainty in an oligopoly

Answer 11

○ Game theory is related to the idea of interdependence between firms in an oligopoly:
w It is used to predict the outcome of a decision made by one firm, when it has incomplete information on another firm.
○ The Dominant Strategy:
◊ The best option regardless of what the other firm chooses
○ The Nash Equilibrium:
◊ A Nash Equilibrium is a concept that describes the best strategy for firms, whilst taking into account what other firms have done