LS5 And 6 - Profit, Loss, Business Objectives

Question 1

Profit

Answer 1

Profit = revenue - costs

Question 2

Normal profit

Answer 2

Breaking even
TC = TR
Price equals TC

Question 3

Supernormal profit

Answer 3

Actual profit
Price above AC
TR > TC
AR > AC

Question 4

Shutdown points

Answer 4

SR - when price is below AVC
LR - when price is below AC

Question 5

Profit maximisation

Answer 5

Pros
* Happens at MC=MR
* Allows firms to reinvest to boost productivity
* Pay shareholders with dividends
* Lower cost –> lower prices
* Reward for entrepenuership

Cons
- No knowledge of MC, MR
- Greater scrutiny - more regulations/investigations which reduces rev and increases costs
- Key stakeholders harmed

Question 6

Revenue maximisation

Answer 6

EoS
Predatory pricing/limit pricing - push out comp
Principal-Agent - Agent can use boost in rev to advantage
Happens at MC=0
Build market share, brand loyalty

Question 7

Sales maximisation

Answer 7

EoS
Limit pricing
Principal-Agent leverage
Flood the market - boost consumer attention and brand loyalty
Happens at AC=AR

Question 8

Satisficing

Answer 8

= sacrificing profit to satisfy as many key stakeholders as possible (shareholders, managers, consumers, workers, government, environmental groups)

Harms workers- low wages

Consumers- high prices

• stakeholders have conflicting interests, firm chooses price point which is profit satisfying
• Minimum level of profit that satisfies each stakeholder is achieved (stems from principal-agent problem)

Eg. Owners want to profit maximise so increase in dividends & firms share priced
Eg. Managers want to sale maximise so increase in their salary

Question 9

Other objectives

Answer 9

Survival - short-run objective to survive in hyper-competitive market, build brand loyalty in short term then grow

Public Sector Org - maximise society interest/welfare –> at D = S => P = MC, decreasing price, increasing quantity and welfare

Corporate Social Responsibility - giving to charity, producing sustainably to protect environment - avoiding excessive polluting activities; ethical and good working conditions

Question 10

Why do objectives change over time

Answer 10

Example: Netflix

Objectives change over time due to growth and meet traditional objectives such as survival, profit maximisation. As they have grown they focus on other objectives such as innovation and competing against:

Changing trends
External environmental
Shareholders
Principal agency problem