Objectives Of Firms

Question 1

What is a firm?

Answer 1

An organisation that brings together factors of production in order to produce output

Question 2

Name 4 firm objectives

Answer 2

• Profit maximisation
• Revenue maximisation
• Sales volume maximisation
• Growth maximisation

Question 3

Rank the firm objectives by speed of GROWTH

Answer 3

1) Growth maximisation
2) Sales volume maximisation
3) Sales revenue maximisation
4) Profit maximisation

Question 4

Rank the firm objectives by most PROFIT

Answer 4

1) Profit maximisation
2) Sales revenue maximisation
3) Sales volume maximisation
4) Growth maximisation

Question 5

Profit maximisation equation

Answer 5

MC=MR

Question 6

How would a firm maximise growth?

Answer 6

By increasing market share and size of the firm. Cutting prices below cost will lead to a loss in the short run, may lead to even higher long run profits

Question 7

What may a firm try to maximise in the short run and why?

Answer 7

Maximise sales or revenue to increase its market share or to gain market power so that it can make monopoly profits in the long run

Question 8

Sales revenue maximisation advantages?

Answer 8

• Faster growth than profit maximisation
• Larger firms gain easier access to finance
• Economies of Scale, more quantity than profit maximisation quantity, lower AC

Question 9

Sales revenue maximisation disadvantages?

Answer 9

-Lower profits than profit maximisation

Question 10

Sales volume maximisation advantages?

Answer 10

• Faster growth than sales revenue maximisation

- Flood the market (many consumers see your product, increase loyalty)

Question 11

Sales volume maximisation disadvantage?

Answer 11

-Lower profits than sales revenue maximisation - profits will be zero

Question 12

Normal profit

Answer 12

The return needed for a firm to stay in the market in the long run

Question 13

Supernormal profits

Answer 13

Profits above normal profits

Question 14

Profit equation

Answer 14

TR-TC

Question 15

Sales revenue maximisation equation

Answer 15

MR=0

Question 16

Sales volume maximisation equation

Answer 16

AC=AR

Question 17

Principle-agent problem

Answer 17

• Arises from conflict between the objectives of the principles (owners) and their agents (managers), who take decisions on their behalf
• If the objectives of managers are different to shareholders, managers may not even be trying to achieve the same objective. Principle-agent problem arises from information asymmetry between managers and owners

Question 18

Utility maximisation

Answer 18

Managers maximising their utility

Question 19

What is Corporate social responsibility (CSR)?

Answer 19

A firm acting to benefit wider society, the community or their employees

Question 20

Profit satisficing

Answer 20

Managers doing just enough to satisfy shareholders by producing satisfactory profits

Question 21

Social welfare

Answer 21

A firm existing to benefit wider society

Question 22

Utility maximisation advantages?

Answer 22

The ‘trappings of power’ may be necessary to recruit the most productive and effective employees

Question 23

Utility maximisation disadvantages?

Answer 23

The ‘trappings of power’ may be expensive and unnecessary

Question 24

Social welfare advantages?

Answer 24

• In private firms, social welfare may be popular with customers, increasing sales
• Most public sector firms have social welfare as their objective

Question 25

Social welfare disadvantage?

Answer 25

High opportunity cost of not earning more profit to be able to donate a large % of profit

Question 26

Corporate Social Responsibility (CSR) advantage?

Answer 26

• CSR may be popular with customers

- CSR may lead to happier and some more productive employees

Question 27

Corporate Social Responsibility (CSR) disadvantage?

Answer 27

CSR may be expensive and divert attention and effort away from more profitable endeavours

Question 28

Profit satisficing advantage?

Answer 28

May prevent unscrupulous (unfair) though legal, behaviour that can lead to new legislation being imposed

Question 29

Profit satisficing disadvantage?

Answer 29

-Leads to lower profits than are possible

Question 30

Why may a firm want to profit maximise?

Answer 30

1) Re-investment
2) Dividends for shareholders
3) Lower costs and lower prices for consumers

Question 31

Why may a firm not profit maximise?

Answer 31

1) Lack knowledge of MC and MR
2) Avoid greater scrutiny
3) Other objectives more appropriate

Question 32

What is allocative efficiency?

Answer 32

At an output level where the Price equals the Marginal Cost (MC) of production.

P=MC

Question 33

What is dynamic efficiency?

Answer 33

A firm which is dynamically efficient will be reducing its cost curves by implementing new production processes
LRAC and SRAC shifting down

Question 34

What is productive efficiency?

Answer 34

A firm is said to be productively efficient when it is producing at the lowest point on the SRAC

Question 35

What is X-inefficiency?

Answer 35

X-inefficiency happens when a lack of effective / real competition in a market or industry means that average costs are higher than they would be with competition. Rising average cost.

Question 36

Growth maximisation advantages?

Answer 36

Faster growth than sales volume maximisation

Question 37

Growth maximisation disadvantages?

Answer 37

Lower profits than sales volume maximisation - profits will be negative (making a loss)