Objectives

Question 1

When does a firm profit max?

Answer 1

MC=MR

Question 2

Where does a firm revenue max?

Answer 2

MR=0

Question 3

Where does a firm sales max?

Answer 3

AC=AR

Question 4

p1 - why do firms prof maximise?

Answer 4

• when prof is maximised their is high revenue which can be used to expand the firm, e.g SNP can be used to achieve allocative efficiency, reinvesting back into the firm
• Profit (SNP) can be used to pay higher wages for staff and directors, incentivising them to be more productive
• Also dividends for directors
• Profit will allow the firm to create reserve funds if unforeseen econ downturn or recession was to come about, this may mean that the firm are able to survive and keep competing
• ## Due to the structures of some markets, firms are forced to profit maximise - firms in perfect competition are price takers meaning that they are less flexible and to remain competitive they must profit maximise where MC=MR

Question 5

p1 - why do firms prof maximise?

Evaluation

Answer 5

firms with monopoly power such as the odeon cinema are more flexibly as they are not pressured by competition to profit maximise. They are able to set their own prices and therefore can seek alternate objectives

Such as profit satisficing - when a firm makes a sufficient amount of profit to satisfy its shareholders

• also difficult for firms to discover the right price to charge for their product and whether that will lead to pof max - if picked wrong and the goods is PED elastic the firm will not be able to prof max
• in terms of inventory - can lead to over or understocking

Question 6

P2 - Why do firms revenue maximise and give def

Answer 6

• where a firm attempts to sell its goods at a price which achieves the greatest sales revenue - where MR=0
• may be more favourable for a firm looking to win over consumers, and gain large amounts of new customers who are attracted by lower process - this may increase the market share of firms - firms such as lidl and Aldi pursue this objective
• win over consumers from higher priced firms - reduce their market share
• can boost cash flow quickly
• alleviation of excess inventory, free up space so that your supply chain transition is smoother
• limit pricing - removes the incentive for other firms to enter the market, gain security against competitors

Question 7

P2 - Why do firms revenue maximise?

Evaluation

Answer 7

• Revenue max does not equate to profits max as it may mean you elect to sell your goods at a loss to clear shelves
• short term strategy, many firms may use this in the short term but then decide to pursue prof max in LR
• rev max will sacrifice profits for revenue in the beginning, this could mean the firm is running at a loss, if they continue to operate over a long stretch of time the firm will collapse
• unsustainable - if done, should be done incrementally, and strategically, to leverage benefits without becoming a losing strat

,

Question 8

p3 - why do firms sales max + def? (growth max)

Answer 8

• firms selling as many units as possible without making a loss
• AC = AR
• normal profits made
• larger output, lower price
• often favoured over PM to achieve a larger market share, which in turn enables a firm to gain monopoly power, allowing it to raise its prices and become more profitable in the LR
• become as large as they possibly can without making a loss, this is known as the breakeven point
• ‘flooding the market’ - consumers become more aware of the product, develop loyalty and name recognition, then allows firms to raise prices - netflix, starbucks

Question 9

p3 - why do firms sales max + def?

Evaluation

Answer 9

• again a short strategy, many firms will not be able to sustain this level of output and such a low price
• leaves firm at risk, vulnerable - no guarantee that higher sales will generate income needed to pay of fixed and variable costs
• principal agent problem - managers pursue own objective to impress shareholders and win over perks
• if a firm then looks to raise its prices, consumers may go to other firms who are cheaper
• need profit in long run

Question 10

Other objectives + conclusion

Answer 10

• survival
• corporate social responsibility CSR - environmental, ethical, charitable considerations and responsibilities
• public sector - improve consumer benefit

conclusion - short term any objective, long term prof max