Different Objectives And Policies Of Firms Flashcards
Q: What is the standard neo-classical assumption about business objectives?
A: The standard neo-classical assumption is that a business seeks to maximize profits from producing and selling an output in a market.
Q: Why might firms pursue objectives other than profit maximization?
A: Firms might pursue other objectives due to the involvement of various groups like employees, managers, shareholders, and customers, each with different goals. Also, it’s difficult for firms to accurately calculate marginal revenue and marginal costs to identify profit-maximizing output.
Q: What is satisficing in the context of business objectives?
A: Satisficing is setting minimum acceptable levels of achievement instead of maximizing behavior. Firms may reduce prices to stop investigations or reward workers to prevent industrial action.
Q: What is the principal-agent problem?
A: The principal-agent problem arises when managers (agents) pursue their own goals and objectives, which may not align with those of the shareholders (principals), potentially leading to satisficing behavior instead of profit maximization.
Q: Why might a firm focus on increasing its market share?
A: Increasing market share is significant in oligopolies where winning market share from rivals is less risky and costly than acquiring new customers.
Q: When might survival be a key objective for a firm?
A: Survival is a key objective for new firms, those in highly competitive markets, or during economic downturns or recessions.
Q: What does increasing shareholder value mean?
A: Increasing shareholder value means increasing the asset value of the business after all debts have been paid.
Q: What are some examples of ethical goals firms might pursue?
A: Examples of ethical goals include reducing carbon emissions and promoting fair trade.
Q: What is sales volume maximization?
A: Sales volume maximization is a strategy where a firm seeks to maximize the number of units sold, increasing its market share while maintaining at least normal profit, where AR = AC.
Q: What is the difference between limit pricing and predatory pricing?
A: Limit pricing seeks to keep new firms out of a market by setting prices low enough to deter entry, while predatory pricing aims to drive existing competitors out by setting prices below cost.
Q: What is the concept of contestable markets?
A: Contestable markets theory suggests that potential competitors can influence the conduct of firms, with market entry and exit barriers determining the level of contestability. Firms may behave as though in a competitive market even without actual competition.
Q: What are sunk costs and their relevance to contestable markets?
A: Sunk costs are unrecoverable costs incurred when entering a market. Low sunk costs increase market contestability by reducing barriers to entry and exit.
Q: How can technological change affect market contestability?
A: Technological change can make a market more contestable by reducing barriers to entry, as seen with the rise of internet-based businesses and services.
