Business Objectives Flashcards
How does profit benefit shareholders?
As shareholders receive dividends & also increase the underlying share price
- an increase in the underlying share price - increases the wealth of the shareholder
When does profits increase/ decrease?
Profits increase : MR > MC
Profit decrease : MR < MC
Why might firms choose to maximise profit?
- provides greater wage + dividends for entrepreneurs
- its a cheap source of finance (saves paying high interest on loans)
- may want to profit maximise in the Long run - consumers don’t like rapid price changes
- may want to profit maximise in the short run - the interest of the owner/ shareholder in most important
When does revenue maximisation occur?
When marginal revenue is equal to zero
(Each extra unit sold generates no extra revenue)
What is normal profit?
- it is the minimum reward necessary to keep the factors of production in their present use
- found at AC = AR or TC = TR
- normal profit covers the opportunity cost of investing funds into the firms and not elsewhere
What happens if the firm fails to produce normal profit?
The firm will cease to produce in the long run
- since the firms resources would be put to better use, producing other goods where normal profit can be earned
What is supernormal profit?
It is the profit above normal profit
- it exceeds the value of the opportunity cost of investing funds into the firm
- when TR > TCor AR > AC
What are losses?
When a firm fails to cover their total costs
What is profit and how is it calculate?
It is the reward factors of production yield when taking risks
profits = revenue - costs
profits = TR - TC
What is Profit maximisation?
It occurs when a firm is operating at the price and output which derives the greatest profit
- when MC = MR
- when TR is as far above the TC curve as possible
- when each extra unit produced gives no extra loss of no extra revenue
TR and TC curve showing loss, normal profit, profit maximisation
Loss - TR < TC
normal - TR = TC
Maximisation - TR < TC
How does a firm choose its output level of it wishes to maximise profits?
The firms needs to choose the output level at which TR is as far above the TC curve as possible
Where MC = MR
What is shut down price?
It is the minimum price a business needs to justify remaining in the market
- if the market price falls below the shut down price the company will incur a loss on each unit of production
Occurs where AR(P) < AVC - the lowest point of the AVC curve
Why can a firm continue operating even when AR < ATC?
Because they are making a contribution to fixed costs and covers AVC
What condition does the firm have to follow if it must remain operating?
That the businesses fixed costs must be paid regardless of the level of output
(Fixed costs are not considered when a decision to shut down is being made)
- should at least make normal profit to stay in the economy
