Microeconomics- Unit 3.1 Business Objectives

Question 1

What is a business objective?

Answer 1

Something a business wants to achieve.

Question 2

What does maximisation mean?

Answer 2

To make something large or as great as possible.

Question 3

What is profit maximisation?

Answer 3

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.

Question 4

What is sales revenue maximisation?

Answer 4

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

This is regardless of costs.

Question 5

What is sales volume maximisation?

Answer 5

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

This can be the objective of new businesses.

Question 6

What is growth maximisation?

Answer 6

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

Question 7

What is utility maximisation?

Answer 7

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

Question 8

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

Answer 8

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

Question 9

What is profit satisficing?

Answer 9

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

Question 10

What is social welfare as an objective?

Answer 10

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

Question 11

What is CSR?

Answer 11

Corporate Social Responsibility

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

Question 12

What is the principal in the principal agent problem?

Answer 12

The owners or shareholders

Question 13

What is the agent in the principal-agent problem?

Answer 13

The managers

Question 14

What is the principal agent problem?

Answer 14

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.

Question 15

How can the principal agent problem be overcome?

Answer 15

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

Question 16

What is X-inefficiency?

Answer 16

When a firm is not operating at minimum cost.

This can because managers are not making profit maximising decisions.

Question 17

What is organic growth?

Answer 17

Where a firm grows in size due to being successful.

Question 18

What is a takeover?

Answer 18

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

These are also known as acquisitions.

Question 19

What is a merger?

Answer 19

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.

Question 20

What is a conglomerate?

Answer 20

A large firm which owns and controls several different businesses.