MICRO - objectives of firms ✅

Question 1

what is the role of owners/shareholders in control

Answer 1

they control a business

Question 2

what is the role of directors/managers in control

Answer 2

shareholders in PLC elect directors and appoint managers responsible for daily running of business but may be divorce between ownership and control

Question 3

what is the role of the workers in control

Answer 3

trade unions enable workers to exert strong pressures on a company regarding wages, work conditions, health&safety without power to run it

Question 4

what is the role of the state in control

Answer 4

provide underlying framework for operation of company - legislation on taxation, environment, consumer protection, health&safety and force them to work in certain way

Question 5

what is role of consumer in control

Answer 5

• consumers can put pressure on companies but can be weak
• consumer sovereignty is power of consumers to allocate resources according to their preferences
• companies providing goods demanded will survive, those who dont will not
• consumers do own business assuming consumer sovereignty exists, yet advertising and marketing may manipulate consumer preferences

Question 6

what is argued the most important interest in the creation of objectives

Answer 6

In neo-classical economics it is assumed that the interest of owners/shareholders are most important

as consumers attempt to maximise utility and workers attempt to maximise wages,

whilst shareholders attempt to maximise dividends therefore it is argued that firms sole goal is to profit maximise

Question 7

what is the assumption of neo-classical economics

Answer 7

Neo-classical economics also assumes that it is the short term profit that firms maximise

Question 8

what determines production levels

Answer 8

marginal cost and revenue

Question 9

what is the assumption of short run profit maximisation

Answer 9

Short run profit maximisation suggests companies are prepared to make a loss as long as:

price is above average variable cost however in the long run firms must cover all costs to stay in the market

Question 10

when do prices fluctuate

Answer 10

In markets with branding, stable prices are anticipated yet in commodity markets with homogenous goods unstable prices are likely

Question 11

where is profit maximisation

Answer 11

Profit maximisation occurs at output where there is greatest difference between total revenue and cost so a firm maximises profits when MR = MC

Question 12

what are alternative beliefs of short/long run profit maximisation

Answer 12

— Non keynesian economists believe that firms maximise their long run profit rather than short run profit based on the belief companies use cost-plus pricing

— Short run profit maximisation suggests firms will change price and output to market conditions however neo-keynesians suggest that rapid price changes damage a company’s market position

Question 13

what is the assumption of price cuts

Answer 13

• Price cuts may be a sign of struggle therefore larger companies may take advantage of this and try to negotiate larger price cuts

Question 14

what is the assumption of price increases

Answer 14

• Price increases may be seen as profiteering as consumers switch to more expensive prices in the hope of better quality or value for money

Question 15

what costs are involved with price changes

Answer 15

• Price changes require changes in price lists = extra costs are involved and its argued firms attempt to maintain stable prices whilst adjusting output to changes in market conditions
• may mean firms will produce in the short run even if it fails to cover its variable cost

Question 16

how can a business produce strategically

Answer 16

• If a firm takes on the idea it may make profit on production of a particular good it may prefer to produce at a loss rather than disrupt the market
• Equally it may cease production in short run even if it can cover its variable costs
• it may prefer to keep prices above market price in short run and sell nothing if it believes short run price cutting would lead to a permanent effect on prices and long run profits

Question 17

what is the likely drive for owners of a company

Answer 17

Owners of a large firm are likely to want to maximise their returns on their investment in the company so short run profit maximisation is likely to achieve this

Question 18

what is the likely drive for directors and managers of a company

Answer 18

directors and managers will share this objective as employees of the company, in line with neo-classical economic theory estimating maximisation of their own rewards

Question 19

why is profit important

Answer 19

• Making profit remains important for managers and directors - they have to be seen to be efficient enough to make profits to justify their remuneration packages
• if profits aren’t high enough the risk of takeover is higher
• if firm makes losses it could be high enough to send the company into liquidation

Question 20

what is profit satisficing

Answer 20

directors and managers making enough profit to satisfy demand of shareholders and the markets (making enough but not maximising profit) once they have satisficed they are free to maximise their own rewards

Question 21

how have behaviour trends changed

Answer 21

• companies attempt to change behaviour of directors and managers by reward for achieving set targets
• as a result there has been a growing gap between the remuneration packages and the wages for workers

Question 22

what is the principal agent problem

Answer 22

• occurs when one group (the agent) is making decisions on behalf of another group (the principal)
• in theory the agent should maximise the benefits for those they are looking after and in principal agents can maximise their own benefits at expense of those of the principles
• eg divorce of ownership from control

Question 23

what is revenue maximisation, what does it use the concept of

Answer 23

• uses the concept of divorce of ownership from control
• it is assumed the objective of managers is to maximise the firms total revenues, subject to a profit satisficing constraint

Question 24

how does revenue maximisation impact costs

Answer 24

• The larger the sales revenue of the firm, the higher the pay of the senior managers is likely to be
• Revenue maximisation and the size of the company is a way for managers to justify their rewards

Question 25

when is total revenue maximised with assumptions

Answer 25

• Total revenue maximised when marginal revenue is zero assuming the firm is a monopolist and the minimum level of profit that will satisfy shareholders is the level of normal profit

Question 26

how does marginal revenue impact total revenue

Answer 26

With a downward sloping marginal revenue selling an extra unit will result in a negative marginal revenue and therefore a fall in the total revenue

Question 27

how is price determined

Answer 27

price it charges is determined by the demand curve which is also the average revenue curve

Question 28

what does a downward sloping demand curve mean

Answer 28

A downward sloping demand curve means that businesses can only sell by lowering its average price

Question 29

what profits do monopolies earn

Answer 29

• In monopolist markets firm can only earn normal profit in the long run
• if we assume that normal profit is the profit satisficing level of output then firms can’t operate at any other level than profit maximising level

Question 30

what is sales maximisation

Answer 30

• Alternative theory of sales maximisation – increasing the number they sell and can be a measure of the size of the firm
• justification from managers and directors over rewards can be made with sales evidence

Question 31

other objectives of firms (6)

Answer 31

• survival
• market share
• growth maximisation
• quality
• social welfare
• utility maximisation models

Question 32

how are survival and market share alternative objectives

Answer 32

Survival – if firm is making a loss then prime goal may be to survive and to do this it may sell assets, or refuse new work in order to make it through

Market share – growth in market share can be an indicator of success to other businesses in the market and may approximate high profits, or appropriate rewards for managers

Question 33

how is growth maximisation an alternative objective

Answer 33

• growth can show in sales volumes, sales revenue, assets or market share
• growth maximisation may be an attempt to maximise long run profitability at the expense of short run loss
• however in a large firm there is a divorce of ownership from control and could be a way of justifying increased rewards

Question 34

how are quality and social welfare alternative objectives

Answer 34

Quality – few firms may be motivated by providing high quality at given price

Social welfare – some firms accept losses in order to maximise social welfare. For example Joseph Rowntree and Edward Cadbury gave their workers good conditions to live in.
Goals exist to pledge to act in a certain way when dealing with issues and large firms likely to have these Corporate Social Responsibility (CSR) policies.
Argued CSR policies do nothing, but improve profitability of a firm eg to recycle when cost savings can be accomplished.
Ethical actions also important to ensure firm doesn’t engage in illegal activity and face prosecution

Question 35

how are utility maximisation models alternative objectives

Answer 35

some models assume stakeholders hold some power in influencing a firms behaviour, and out to maximise their welfare so behaviour is determined by stakeholder power.

EG/ small businesses more influenced by owners. larger firms are influenced by trade union powers, firms may also be targeted by pressure groups to pay more attention to issues such as the environment or animal welfare rights

Question 36

what is consumer sovereignty

Answer 36

exists when the economic system allocates resources totally according to the preferences of consumers

Question 37

what is cost-plus pricing

Answer 37

technique adopted by firms of fixing a price for their products by adding a fixed percentage profit margin to the long run average cost of production

Question 38

when is profit maximised

Answer 38

occurs when the difference between total revenue and total cost is greatest

Question 39

when is revenue maximised

Answer 39

occurs when total revenue is highest and when marginal revenue equals zero

Question 40

what is sales maximisation

Answer 40

occurs when the volume of sales is greatest; when the objective of a firm, this is usually subject to a profit satisficing constraint