Business Objectives Flashcards
Stakeholders def.
The different groups of people that influence a firm’s behaviour and decisions
Business Objectives
4
Short-Run Profit Maximisation - Where marginal revenue = marginal cost. Firms will adjust prices with changes in demand
Long run Profit Maximisation - issues w this as changing prices has menu costs, could be deemed to be ‘profiteering’ & lose customers if they raise prices in a shortage
Revenue Maximisation - Marginal Revenue is 0
Sales Max. -
Produce at AC=AR, earning normal profits.
Profit satisficing - Aiming for profit which is enough to satisfy the owners, rather than profit maximisation. Could occur when
Objectives of managers
Increasing the size of the business can lead to performance-related bonuses. As such, Economist Robin Marris suggested that managers may Sales Max. (AC=AR) as their salary may be linked to size of the company
Profit Maximisation
Neo-classical economics assumes that the interests of owners & shareholders are most important, thus most firms Profit Maximise
MR=MC
e.g. Apple
Profit Maximisation Pros & Cons
2 & 3
Pros -
Can expand through greater profits –> reinvest in R&D –> Dynamic Efficiency
Higher dividends of shareholders
Cons -
Consumers deal with higher prices –> Lower consumer surplus
Supernormal profits can attract new firms into the market –> reducing market share / revenue in the long run. However, in a Monopoly this may not occur as much due to high barriers to entry
Over-focus on profit can lead firms to lose sight of ethics – > detrimental to local firms / consumers
Profit Maximisation Formula
MR = MC
Revenue Maximisation Formula
MR = 0
Revenue Maximisation
3
William Baumol suggested managers are most interested in revenue as this is what their salary often depends on
MR=0
Amazon, Lidl & Aldi follow Rev. Max., with the aim of increased market share - Amazon rev. neared £120bn in 2015, with profit staying stable. Lidl & Aldi market share increased from 8.4% in 2015 to 13.6% in 2020
Rev. Max. Pros & Cons
2
Pros -
Low prices –> More exposure –> Increased brand loyalty (Lidl & Aldi market share went from 8.4% in 2015 to 13.6% in 2020)
Can push rival firms out of the market as they cant compete w low prices –> more market share –> more revenue (Good for consumer in SR, worse in LR as less competition, firm can become a price-maker)
Economies of Scale from more Market Share
Cons -
In the Short Run, consumers benefit from greater consumer surplus due to lower prices –> more purchasing power –> better living standards/consumer welfare.
In the Long Run, however, consumers may be at a disadvantage as the firm has greater market share –> can raise prices as less competition
Necessitates a fall in price, which other firms may copy (especially in an oligopoly due to interdependence) so they may see little to no increase in revenue
Sales Maximisation
4
AC=AR
Economist Robin Marris suggested that managers may Sales Max. (AC=AR) as their salary may be linked to size of the company
Sales Maximising results in lower prices and more output than PM
Tends to be a short term strategy, in the LT firms more likely to PM
Netflix & Spotify follow Sales Maximisation
Sales Maximisation Pros & Cons
3 & 1
Pros -
The level of growth may increase business’ prestige
Growth will increase market share, which can push other firms out of business + more power over prices
Size often linked to security, as it is believed large firms can survive rough periods (e.g. recession) more easily e.g. Workplace Employment Relations Surveys 2011 showing 22.5% of SMEs said they were affected ‘a great deal’ by the 2008 recession, compared to only 14% of Large Firms.
Cons -
Necessitates a fall in price, which other firms may copy (especially in an oligopoly due to interdependence) so they may see little to no increase in revenue
Satisficing
Due to the principal agent problem, managers & directors will have different goals
Making enough profit to keep owners happy, whilst following other objectives.
