MICRO - objectives of firms ✅ Flashcards
what is the role of owners/shareholders in control
they control a business
what is the role of directors/managers in control
shareholders in PLC elect directors and appoint managers responsible for daily running of business but may be divorce between ownership and control
what is the role of the workers in control
trade unions enable workers to exert strong pressures on a company regarding wages, work conditions, health&safety without power to run it
what is the role of the state in control
provide underlying framework for operation of company - legislation on taxation, environment, consumer protection, health&safety and force them to work in certain way
what is role of consumer in control
- 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
what is argued the most important interest in the creation of objectives
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
what is the assumption of neo-classical economics
Neo-classical economics also assumes that it is the short term profit that firms maximise
what determines production levels
marginal cost and revenue
what is the assumption of short run profit maximisation
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
when do prices fluctuate
In markets with branding, stable prices are anticipated yet in commodity markets with homogenous goods unstable prices are likely
where is profit maximisation
Profit maximisation occurs at output where there is greatest difference between total revenue and cost so a firm maximises profits when MR = MC
what are alternative beliefs of short/long run profit maximisation
— 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
what is the assumption of price cuts
- Price cuts may be a sign of struggle therefore larger companies may take advantage of this and try to negotiate larger price cuts
what is the assumption of price increases
- Price increases may be seen as profiteering as consumers switch to more expensive prices in the hope of better quality or value for money
what costs are involved with price changes
- 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
how can a business produce strategically
- 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
what is the likely drive for owners of a company
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
what is the likely drive for directors and managers of a company
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
why is profit important
- 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
what is profit satisficing
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
how have behaviour trends changed
- 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
what is the principal agent problem
- 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
what is revenue maximisation, what does it use the concept of
- 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
how does revenue maximisation impact costs
- 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
when is total revenue maximised with assumptions
- 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
how does marginal revenue impact total revenue
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
how is price determined
price it charges is determined by the demand curve which is also the average revenue curve
what does a downward sloping demand curve mean
A downward sloping demand curve means that businesses can only sell by lowering its average price
what profits do monopolies earn
- 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
what is sales maximisation
- 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
other objectives of firms (6)
- survival
- market share
- growth maximisation
- quality
- social welfare
- utility maximisation models
how are survival and market share alternative objectives
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
how is growth maximisation an alternative objective
- 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
how are quality and social welfare alternative objectives
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
how are utility maximisation models alternative objectives
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
what is consumer sovereignty
exists when the economic system allocates resources totally according to the preferences of consumers
what is cost-plus pricing
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
when is profit maximised
occurs when the difference between total revenue and total cost is greatest
when is revenue maximised
occurs when total revenue is highest and when marginal revenue equals zero
what is sales maximisation
occurs when the volume of sales is greatest; when the objective of a firm, this is usually subject to a profit satisficing constraint
