Micro 18 - Business objectives and Economic efficiency Flashcards
What is a shareholder?
A shareholder is someone who legally owns a part of a company
What rights does a shareholder of a company have?
They have the rights to:
- Attend general meetings
- Possible receive a share of the profits
- Usually a board of directors would decide what portion of profits to reinvest and what amount to give back to the shareholders as dividend. A shareholder would get 1% of the amount allocated to dividends
What would a shareholder lose if the firm went bankrupt?
If the firm went bankrupt you would lose the amount invested in the shares but no more, your own personal assets wouldn’t be at risk
What is a Publicly limited company (plc)?
A plc is a company in which its shares are for sale publicly meaning anyone with the money can buy shares from the stock exchange
What is a privately limited company (ltd)?
An ltd does have shareholders despite being privately limited. This means not everyone can buy shares in these companies. Permission would need to be gained from existing shareholders to buy into the business
When do shares raise money for a business?
Shares raise money for a business when the shares are initially sold. If you then buy the shares from someone else this does not raise money for the business
What are some reasons why a firm want to keep its shareholders happy?
- For PLCs the share price is determined by demand and supply. If the business is thought to be doing badly many people will sell their shares and demand for buying these shares will be low as investors will not expect a dividend. This leads to supply shifting right and demand shifting left resulting in a lower share price. This is bad for a firm as a lower share price could make them a target for takeover possibly meaning job losses and the board of directors being replaced
- Unhappy shareholders may also make it difficult to raise more share capital in the future from selling new shares. Shareholders may not approve of this decision which could mean the firm have to resort to an expensive bank loan instead
What are the main general business objectives for firms?
- Profit maximisation
- Revenue maximisation
- Sales maximisation
- Profit satisficing
Describe profit maximisation as a business objective
Profit maximisation is the objective for a firm to make as high level of profit as possible and so firms may choose to produce the level of output to profit maximise at MR=MC
What are some of the reasons a business may choose to pursue profit maximisation as an objective?
- Profit maximisation is a rational business objective to follow and will satisfy shareholders - dividends
- Happy shareholders will mean they are not keen to sell their shares. This will mean the share price will remain high and the firm is at less risk of takeover
- Keeping shareholders happy is likely to mean raising more money from issuing shares in the future is easier
- Profit maximisation leads to high levels of profit for reinvestment. These profits can be used to improve efficiency through buying more efficient capital goods for example
What are some of the reasons a business may not choose to pursue profit maximisation as an objective?
- Profit maximisation is difficult as it involves precise knowledge of marginal revenue and marginal cost. This is difficult to know and firms may need to calculate it using trial and error. Even if a firm does know this information, in quickly changing markets this information may soon become out of date
- High profits may attract new entrants into the market
- They may not be private sector businesses as public sector organisations are unlikely to have profit maximisation as an objective
- They may want to avoid attention or investigation from competition authorities so may keep profit lower than they could
- Profit maximisation can neglect other stakeholders such as employees who are essential for the long term success of the business
- Profit maximisation could involve cutting corners - quality or safety
Describe revenue maximisation as a business objective
Revenue maximisation is an objective that occurs where a firm produces where marginal revenue is zero to achieve the highest possible level of total revenue
What are the reasons why a firm may choose to maximise revenue as a business objective?
- Market share
- Brand loyalty
- Divorce of ownership and control - managerial reasons
- To avoid attracting attention of competition authorities
Describe sales maximisation as a business objective
Sales maximisation occurs when a firm sells as many units as possible without making a loss and this occurs where average revenue is equal to average cost (AR=AC)
What are the reasons a business may aim to maximise sales as a business objective?
- Public sector organisations may pursue this
- To survive
- To create brand loyalty
- To increase market share and exploit economies of scale
- To reduce levels of competition