business objectives

Question 1

what are the business objectives (4)

Answer 1

profit maximization
revenue maximisation
sales maximisation
survival
Corporate social responsibility- not for profit organisation 

Question 2

what is profit maximization on a graph

Answer 2

mc=mr because costs are equal to revenue

Question 3

what is revenue maximization

Answer 3

mr= 0

Question 4

what is sales maximization

Answer 4

ac=ar

Question 5

what is supernormal (or abnormal) profit

Answer 5

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.

Question 6

profit equation

Answer 6

tr-tc
if tr>tc, making a profit

Question 7

what is normal profit

Answer 7

TR=TC
econ profit= 0
minimum level of profit needed for a firm to remain in business in the long run

Question 8

what does this mean long term for these firms

Answer 8

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.

Question 9

what are explicit costs

Answer 9

direct, out-of-pocket expenses that a firm experiences when producing goods or services

Question 10

examples of explicit costs (just for your understanding)

Answer 10

wages, raw materials, rent, utilities

Question 11

what are implicit costs

Answer 11

the opportunity cost of one course of action that leads to lower income which is not usually recorded

Question 12

examples of implicit costs (just for your understanding)

Answer 12

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.

Question 13

what is accounting profit (the formula)
the definition is the formula

Answer 13

AccountingProfit=TotalRevenue−ExplicitCosts

Question 14

when is a firm making a loss

Answer 14

tr<tc

Question 15

what is the shut down rule for the short run

Answer 15

if tr<tvc OR EQUIVALITENTLY ar<avc

Question 16

why

Answer 16

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

Question 17

what is the shut down rule for the long run

Answer 17

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

Question 18

why is ar= price (perfect competition)

Answer 18

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)

Question 19

what is marginal revenue
(don’t deep it)

Answer 19

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.

Question 20

what is average revenue (don’t deep it!)

Answer 20

revenue a firm earns per unit of output sold

Question 21

what is total revenue and its formula

Answer 21

total income a firm receives from the sale of its goods or services
price x quantity

Question 22

does this influence pricing strategies

Answer 22

yes

Question 23

what types of firms are price makers

Answer 23

monopolies

Question 24

what types of firms are price takers

Answer 24

perfect competition
(remember its the diagram with the industry and firm and the straight line for price)
you got this queen

Question 25

what is Corporate social responsibility- not for profit organisation 

Answer 25

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.

Question 26

why do firms want to maximise their profits (4)

Answer 26

reinvestment
dividends and share holders
Low costs or lower prices for consumers
Reward for entrepreneurship - probs their primary aim

Question 27

what are drawbacks of this though (4)

Answer 27

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 

Question 28

why revenue maximization? (4)

Answer 28

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.

Question 29

what is the principle- agent problem and what can this lead to

Answer 29

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.