Chapter 2 - Business Objectives

Question 1

Profit maximisation

Answer 1

MC = MR
Advantages:
- Better paid jobs
- Retained profits
- Shareholders’ benefits
Disadvantages:
- Increase in price, which decreases consumer surplus
- Opportunity cost - unsustainable
- Government may intervene

Question 2

Revenue maximisation

Answer 2

MR = 0
Advantages:
- Competitors out of business
- EOS
- Greater market share which leads to a greater influence over prices
Disadvantages:
- Decrease prices
- Competition decreases negatively affect customers

Question 3

Sales maximisation

Answer 3

AC = AR
Short term strategy to enter the market and gain market share

Question 4

Satisficing

Answer 4

Managers are likely to profit satisfice
- Earning just enough profits to keep shareholders happy
- Occurs when there is divorce of ownership and control

Question 5

Principal agent

Answer 5

The agent makes the decisions but maybe not exactly how the principal would like

Question 6

Revenue

Answer 6

Total: income generated from sale - P x Q
Average: price/unit sold - total / Q
Marginal: change in revenue for selling an extra unit - change in total / change in Q

Question 7

Costs

Answer 7

Short run: one factor is fixed
Long run: enough time has passed to increase all factors
Fixed: costs that don’t change
Variable: costs that change depending on the output
Total: Total Fixed + Total Variable
Marginal: change in total cost that comes from producing an extra unit
Average fixed costs: Total fixed costs / Q
Average variable costs: Total variable costs / Q
Average total costs: Total costs / Q

Question 8

Why do the curves look like that?

Answer 8

AFC: decreases as the quantity increases - girl maths
MC: law of diminishing marginal returns
- MC is above ATC the average goes up and viceversa
AVC is always lower than ATC because ATC = AFC + AVC

Question 9

Economies of Scale

Answer 9

Benefits from expanding - increased efficiency
- LRAC graph

Question 10

External economies of scale

Answer 10

Availability of skilled labour
Access to transport links
Sharing knowledge
Better technology and infrastructure

Question 11

Internal economies of scale

Answer 11

Individual actions
1. Risk bearing: the larger, the greater variety of goods - spread risks and decrease costs
2. Managerial: big firms hire experts, which lead to increased efficiency
3. Technical: big firms have the possibility to invest in machinery
4. Marketing: increased quantity leads to lower average fixed
5. Financial: easier to borrow money for big firms - safer for banks and get a lower IR
6. Purchasing: bulk buying

Question 12

Diseconomies of scale

Answer 12

When a firm is too large, so its average costs increase
- Communication
- Coordination
- X inefficiency

Question 13

Profits and losses

Answer 13

Normal: minimum level of profit
Supernormal: profit achieved in excess of normal profit
Losses: profits less than normal profit - Price < ATC
Short run shut down point: AR = AVC
Long run shut down point: AR = AC