Microeconomics- Unit 3.1 Business Objectives Flashcards

Paper 1

1
Q

What is a business objective?

A

Something a business wants to achieve.

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2
Q

What does maximisation mean?

A

To make something large or as great as possible.

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3
Q

What is profit maximisation?

A

When a business aims to have the greatest difference between total costs and total revenue, leading to the highest profit.

This is the most logical and rational objective for a firm and is assumed in models of firms’ behaviour.

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4
Q

What is sales revenue maximisation?

A

A firm aiming to have the greatest amount of money from sales as possible.

This is regardless of costs.

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5
Q

What is sales volume maximisation?

A

When a business aims to sell as many units of a good or service as possible.

This can be the objective of new businesses.

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6
Q

What is growth maximisation?

A

When a firm aims to increase its size as much as possible.

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7
Q

What is utility maximisation?

A

When the managers of a business aim to increase their own happiness as much as possible.

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8
Q

Give an example of how a manager in a business might maximise their own utility.

A

Awarding themselves a wage increase or employing more people to have a bigger team **or **increasing the company car allowance.

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9
Q

What is profit satisficing?

A

When a firm earns enough profit to keep the owners happy.

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10
Q

What is social welfare as an objective?

A

When a business aims to make society better through its actions.

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11
Q

What is CSR?

A

Corporate Social Responsibility

When a business aims to make a profit, do what is right for society and

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12
Q

What is the principal in the principal agent problem?

A

The owners or shareholders

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13
Q

What is the agent in the principal-agent problem?

A

The managers

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14
Q

What is the principal agent problem?

A

The conflict between the objectives of the principals (owners) and their agents (managers) who take decisions.

The principal agent problem results from asymmetric information. The agents have better information about day to day decisions compared to the principals.

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15
Q

How can the principal agent problem be overcome?

A

By improved monitoring of the agents’ decisions or by giving managers an incentive to focus on profits e.g. shares, dividend, profits.

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16
Q

What is X-inefficiency?

A

When a firm is not operating at minimum cost.

This can because managers are not making profit maximising decisions.

17
Q

What is organic growth?

A

Where a firm grows in size due to being successful.

18
Q

What is a takeover?

A

Where a firm takes control of another firm with the aim of external growth.

These are also known as acquisitions.

19
Q

What is a merger?

A

A merger is the voluntary joining together of two companies into a new company.

These can be vertical, horizontal or the formation of a conglomerate.

20
Q

What is a conglomerate?

A

A large firm which owns and controls several different businesses.