Business Objectives - Profit, Revenue, Sales Max And Satisficing Flashcards
Profit maximising (3++)
Neo classical economists assume interests of shareholders are the most important
The goals of firms = profit maximise = workers maximise rewards + shareholders = motivated by maximising their gain from the company
They also assume that it is short run profits that firm will maximise
What does SR profit max imply (2)
Firms will be prepared to supply even if they make a loss in the short run as long as price is above the average variable cost of production
In the long run = firms must cover all their costs or they will leave the market.
Long run profit maximisation (2)
Keynesian economists believe that firms maximise their long run profit rather than their short run profit
This is because firms use cost plus pricing techniques
What is cost plus pricing technique (3)
The price set is based on the long run costs of the firm
Works out the average total cost of operating at full capacity and then adds a profit on top of each item
Consumers dislike price changes + come at a cost of the company
What is profit satisficing (4)
Outcome of market failure
Info gaps and PAP
As a firm grows = managers act on behalf of shareholder
Instead of max profit = rational = enough profit to satisfy shareholders but focus on their own bonuses/rewards
What is revenue maximisation
We assume that the objectives of managers is to maximise revenues for the firm = higher pay and prestige for manager
What is sales maximisation (3)
Maximise the number of products sold
Managers + directors use sales to judge the size of the firms and justify their rewards
Earning normal profits will satisfy the needs of the owners
Revenue max on diagram (3)
MR = 0
Firm still makes abnormal profits
However profit is not as large as when they’re profit maximising
Sales maximisation diagram (2)
AC = AR = normal profit
Reduced price and increased output
