business objectives Flashcards
What is the primary objective of firms in traditional economic theory?
Profit maximization
Profit maximization is assumed to be the goal for firms to facilitate reinvestment, reward shareholders, and manage costs.
Why is profit maximization important for reinvestment?
It allows for new capital, upgraded technology, and research and development (R&D)
Particularly crucial for industries like pharmaceuticals and electronics.
What are dividends in the context of profit maximization?
A share of the profit paid to shareholders
Shareholders are the owners of a company and benefit from profit maximization.
How can profit maximization lead to lower costs for consumers?
By keeping costs low, businesses can pass on savings to consumers through lower prices
This can increase market share for the business.
What does profit maximization reward?
Entrepreneurship and risk-taking activity
It acknowledges the risks taken when starting a business.
At what point does profit maximization occur?
Where marginal cost equals marginal revenue
This is the point where no more extra profit can be made.
What is one reason businesses may not profit maximize?
Lack of knowledge about their marginal costs and marginal revenues
This lack of information can hinder profit maximization.
Why might a firm avoid profit maximization to reduce scrutiny?
Large profits can attract regulatory investigations
Regulators may question high prices or low standards.
What is profit satisficing?
When a business sacrifices profit to satisfy key stakeholders
The term is a combination of ‘satisfy’ and ‘sacrifice’.
Who are considered key stakeholders?
Anyone with an interest in how a business performs, such as shareholders, managers, consumers, workers, and the government
Stakeholders can be affected by a business’s approach to profit maximization.
What can happen if a business harms its consumers?
It can suffer from a bad reputation
A poor reputation can lead to decreased sales and customer loyalty.
What is revenue maximization?
Occurs when marginal revenue is equal to zero
This strategy focuses on increasing total revenue rather than profits.
What are two reasons a company might pursue revenue maximization?
- Economies of scale benefits
- Predatory pricing to drive out competitors
What is the principal-agent problem?
The separation between ownership (shareholders) and control (managers)
Managers may prioritize their own perks over profit maximization.
What is sales maximization?
The goal to become as large as possible without making a loss
This occurs at the break-even point where average cost equals average revenue.
What is the limit price in sales maximization?
The price at break-even which prevents new firms from entering the market
This strategy limits competition.
Why might businesses pursue survival as an objective?
To endure in a hyper-competitive market and build brand awareness
Survival can lead to loyalty, allowing for future profit maximization.
What is the objective of public sector organizations?
To maximize social interest and welfare
They aim for allocative efficiency where demand equals supply.
What is corporate social responsibility (CSR)?
Recognizing social responsibility in business practices
This includes ethical practices, sustainability, and fair treatment of workers.
Where does profit satisficing occur on the profit diagram?
Anywhere between profit maximization and sales maximization
This range indicates a balance between profit and stakeholder satisfaction.
