business objectives Flashcards
what are the business objectives (4)
profit maximization
revenue maximisation
sales maximisation
survival
Corporate social responsibility- not for profit organisation
what is profit maximization on a graph
mc=mr because costs are equal to revenue
what is revenue maximization
mr= 0
what is sales maximization
ac=ar
what is supernormal (or abnormal) profit
TR>TC- including both explicit (direct) and implicit (opportunity) costs.
level of profit that exceeds the normal profit required to keep a firm in business.
profit equation
tr-tc
if tr>tc, making a profit
what is normal profit
TR=TC
econ profit= 0
minimum level of profit needed for a firm to remain in business in the long run
what does this mean long term for these firms
If a firm only earns normal profit, it has no incentive to leave the industry but also no incentive to expand, as it is covering its costs without generating extra returns.
what are explicit costs
direct, out-of-pocket expenses that a firm experiences when producing goods or services
examples of explicit costs (just for your understanding)
wages, raw materials, rent, utilities
what are implicit costs
the opportunity cost of one course of action that leads to lower income which is not usually recorded
examples of implicit costs (just for your understanding)
an owners time
If a business uses its own savings for investment, the implicit cost is the interest it could have earned by keeping the money in a bank.
what is accounting profit (the formula)
the definition is the formula
AccountingProfit=TotalRevenue−ExplicitCosts
when is a firm making a loss
tr<tc
what is the shut down rule for the short run
if tr<tvc OR EQUIVALITENTLY ar<avc
why
if ar (price) is lower than avc the firm cannot even cover its variable costs
continuing to produce will increase firms losses as they would still have fixed costs to pay
what is the shut down rule for the long run
if a firm cannot cover tc, firms will shut down
ar<atc
if ar is below atc, firms cannot create profit
if this is persistent with no expectation of future profitability, firms will exit the market
why is ar= price (perfect competition)
AR represents the revenue per unit of output sold, and in a perfectly competitive market, the price is constant for each unit sold (mr darp von)
what is marginal revenue
(don’t deep it)
additional revenue a firm earns from selling one more unit of a good or service. It shows how total revenue changes with each additional unit sold.
what is average revenue (don’t deep it!)
revenue a firm earns per unit of output sold
what is total revenue and its formula
total income a firm receives from the sale of its goods or services
price x quantity
does this influence pricing strategies
yes
what types of firms are price makers
monopolies
what types of firms are price takers
perfect competition
(remember its the diagram with the industry and firm and the straight line for price)
you got this queen
what is Corporate social responsibility- not for profit organisation
businesses have a responsibility not only to maximize profits for their shareholders but also to consider the broader impact of their activities on society and the environment.
why do firms want to maximise their profits (3)
reinvestment
dividends and share holders
Reward for entrepreneurship - probs their primary aim
what are drawbacks of this though (4)
Profit maximisation point- mc=mr (firms don’t have enough information to know their mr)
Greater scrutiny. Firms increase total revenue by charging higher prices so it’s not consumer friendly. Regulators get involved Total costs being low could be because of exploitation of workers- trade unions get involved and other government agencies in order to find out reason why TC so low
Key stakeholders are harmed
Other objectives are more important e.g survival
why revenue maximization? (4)
1) economies of scale
2) predatory price- decreasing prices to get rid of other firms in the market/ deter them from entering . have greater market share.
3) principal- agent problem
Divorce between ownership and control- managerial objectives. higher revenue may be linked to higher wages or promotions.
what is the principle- agent problem and what can this lead to
asymmetric information problem. It comes about because owners of a firm often cannot observe directly easily and accurately the key day-to-day decisions of management
The principal-agent problem can lead to market failure because the agent (e.g manager wanting revenue maximization not profit maximization) pursues his own self-interest rather than that of the principal and the business may be run in an inefficient way.
drawbacks of revenue maximisation (2)
1 of the points is one of the reasons for
principle agent problem- can use this as a drawback
reduced profit margins- may compromise firms financial health
what are the reasons for sales maximisation (2)
market share expansion- enhance presence and therefore competition. encourage smaller rivals to leave comp increasing monopolistic power
economies of scale-reducing average costs and potentially increasing profitability in the long run as it can can jeopardize a firm’s ability to invest in research and development, marketing, or other essential activities, potentially leading to business failure.
drawbacks of sales maximisation (2)
second von bit shit ibr
reduced profit margins- may compromise firms financial health
may saturate the market which is when a g/s supplied to the market in such large quantities that the demand is fully met, and there is little to no room for additional sale
2 advantages of profit maximization
better quality products
Greater choice for consumers – if firms have invested into new technology or innovation, they may be able to offer consumers a wider range of goods / services
2 advantages of revenue maximization
barriers to entry- by charging lower prices, they can establish a stronger market position through increased sales can deter potential entrants
Brand Loyalty – offering lower prices to customers will help retain them and firms will stand out in the market, hence increasing its brand loyalty
3 advantages of sales maximization
2 the reasons gng
economies of scale
market share expansion
Enhanced Brand Loyalty- by focusing on maximizing sales, firms may offer competitive pricing or improved products, fostering customer loyalty and repeat business.
which 2 business objectives have supernormal profit
profit maximization
revenue maximization
what type of profit does sales maximization have
check dis von maybe
normal
