Economics - 1.3.1 - Business Objectives Flashcards
What is profit maximisation
When firms wish to profit maximise
Profits= the difference between total revenue and total cost
What is the definition of normal profit?
The return needed for a firm to stay in a market in the long run.
When profit maximising, firms ensure they produce levels of goods and services required to stay in business
What are the assumptions of profit maximising ?
Its a good idea for firms to not profit maximise in the short run.
Benficial to be socially responsible to gain consumer trust in the short run
Profit maximisation simplifies complex behaviour in firms
What are the advantages of profit maximisation?
Simple and looks at a balance of high revenue and low cost
Creates cashflow and cost efficiency
Allows shareholders to maximise profits and managers to maximise their bonus
What are the disadvantages of profit maximisation?
Risk - All or nothing
Difficult to do due to stakeholders wanting different things ( principle agent problem)
Cost cutting and revenue maximising creates resentment
Whats the principle agent problem?
Arises from conflict between objectives of principals and agents
Shareholders delegate decisions to managers
Problems arise when managers obtain more info than principals
Managers offer bonuses depending on profits
What are the assumptions of principle agent problem?
If managers and shareholders work together with the same info theres no problem
When theres assymetric info its difficult to keep aims of managers and shareholders the same
What is the sales revenue maximisation
Maximising the ampunt of revenue a firm recieves
Managers are incentivised to work hard and gain revenue as salaries link to revenue
Firms lower prices to increase output and sales
What does the sales revenue maximisation depend on?
Depends on if managers get a bonus and how much of the business a manager controls
Shareholders may be unhappy to give out large bonuses to managers
What is the sales volume maximisation?
Maximising the amount of goods and services a firm sells
As managers salaries link to performance managers are incentivised to work harder to gain more sales
What does sales volume maximisation depend on?
There may be little profits in selling lots of units and may cost too much for a firm
What is utility maximisation?
Maximising the happiness of managers
As managers are motivated if theyre happy they may work harder and produce more sales/revenues/profits for the business
What does utility maximisation depend on?
Seems like a large waste of resources to make managers happy
Also more profit for shareholders if managers arent given bonuses and perks
What is the definition of non-maximising
When firms dont aim to maximise something
What is satisficing?
Managers aim to produce satisfactory results for the firm rather than trying to maximise them
Firms may be unable to maximise
Satisficing is more efficient but loses accuracy and maximisation
