Business Objectives Flashcards
What is a firm?
An economic agent/organisation that brings together factors of production in order to produce output
What are two of the most important decisions firms make?
- production (how much they will make)
- selling price
What is short run
The time period when a firm is free to vary its input of at least one variable factor of production, usually labour, but faces fixed inputs of other factors of production usually capital
What is the law of diminishing returns
- if firm increases number of inputs of the variable factor (being labour) while holding constant the input of the other factor (capital)
- it will gradually drive less addition per output per unit of labour for each further increase
What are total costs?
Fix costs + total variable costs
- sum of all costs incurred to produce a level of output
What is the average cost?
Total cost divided by level of output
What is the marginal cost?
The cost incurred from producing one more unit of output
What are fixed cost?
Costs that do not change directly without output
What are variable costs?
Cost that change directly with output
What are sunk costs
Costs a firm can’t avoid paying even if it produces no output at all
- cannot be recovered
What is the long run?
Possible for affirm to alter all factors of production therefore all costs must be variable
Economies of scale
Having lower long run average cost that result from an increase in the scale of production
What are the diseconomies of scale?
Disadvantages that occur if the scale of production becomes too large
- Increasing long run average costs
What are internal economies of scale?
Economies of scale that arise from the expansion of a firm
Different type types of economies of scale
- division of labour: specialisation and lower unit costs
- Financial: negotiate lower rates of interest
- Purchasing: bulk buying
- Management: employee managers to monitor the workforce
- Technical: specialist machinery
- Marketing: bulk buy advertising
What is economy of scope?
- average cost of production decreases as a result of increasing the number of different goods produced
What are external economies of scale?
- Expansion of an industry in which the firm is operating
Different types of external economies of scale
- Technology:
- Concentration: lower transport costs as firms are closer together
Different types of diseconomies of scale
- Communication: becomes difficult as the increase output?
- Coordination: organising production becomes difficult
- Motivation: hard to to increase all employees as the increase output
What is the minimum efficiency scale?
Smallest level of output, a firm can produce at the minimum level of a long run average cost
What is the importance of minimum efficiency scale?
- A firms MES is the lowest scale necessary to achieve economies of scale in its industry
What is total revenue ?
Revenue received from sales
P x Q
What is marginal revenue?
Additional revenue received if it sells an additional unit of you don’t need to explain output
What are the main influences on revenue?
Price and demand
What is accounting profit?
Profit made by business based on costs incurred but excluding opportunity cost
What is normal profit
Level of profit needed to keep a firm in the market in the long run
What is abnormal profit?
Profit over and above the normal profit
What are the different objectives for firms?
Profit maximisation
Sales revenue maximisation
Sales volume maximisation
Utility and growth maximisation
- Social welfare, profit satisficing and csr
At what level do firms maximise profit?
MC = MR
What is the principal agent problem?
- conflict between objectives of managers(principles) and owners(agents)
How can the principal agent problem be overcome?
- make every employee a principal - manager
- build in profit bonuses and contracts
Where is sales revenue maximise?
Where MR=0
What is the sales revenue maximisation?
Making as much revenue from sales as possible,
What is sales volume maximisation?
Businesses pursue an objective of selling as many units as possible
- Usually new or small firms
What is growth maximisation?
- businesses pursuing objective of growth so that they can become as large as possible
- Possibly to gain economies of scale
- can influence the market
What is utility maximisation?
Refers to the satisfaction of managers in the business
- managers made decision gaining maximum satisfaction for themselves, e.g. Pay rise for themselves
What is profit that satisficing?
- Business sets a reasonable level of profit that will satisfy owners
What is social welfare?
- Firms that don’t seek to max profits
- Are set out to improve social welfare in the economy
What is corporate social responsibility?
A responsibility to do what is right for society and the environment
- Will also be responsible to major stakeholders in their business
What can influence a firms objectives?
- The owners
The managers
The market
The relationship between owners and managers
