Objectives Of Firms Flashcards
What is a firm?
An organisation that brings together factors of production in order to produce output
Name 4 firm objectives
- Profit maximisation
- Revenue maximisation
- Sales volume maximisation
- Growth maximisation
Rank the firm objectives by speed of GROWTH
1) Growth maximisation
2) Sales volume maximisation
3) Sales revenue maximisation
4) Profit maximisation
Rank the firm objectives by most PROFIT
1) Profit maximisation
2) Sales revenue maximisation
3) Sales volume maximisation
4) Growth maximisation
Profit maximisation equation
MC=MR
How would a firm maximise growth?
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
What may a firm try to maximise in the short run and why?
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
Sales revenue maximisation advantages?
- Faster growth than profit maximisation
- Larger firms gain easier access to finance
- Economies of Scale, more quantity than profit maximisation quantity, lower AC
Sales revenue maximisation disadvantages?
-Lower profits than profit maximisation
Sales volume maximisation advantages?
- Faster growth than sales revenue maximisation
- Flood the market (many consumers see your product, increase loyalty)
Sales volume maximisation disadvantage?
-Lower profits than sales revenue maximisation - profits will be zero
Normal profit
The return needed for a firm to stay in the market in the long run
Supernormal profits
Profits above normal profits
Profit equation
TR-TC
Sales revenue maximisation equation
MR=0
Sales volume maximisation equation
AC=AR
Principle-agent problem
- 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
Utility maximisation
Managers maximising their utility
What is Corporate social responsibility (CSR)?
A firm acting to benefit wider society, the community or their employees
Profit satisficing
Managers doing just enough to satisfy shareholders by producing satisfactory profits
Social welfare
A firm existing to benefit wider society
Utility maximisation advantages?
The ‘trappings of power’ may be necessary to recruit the most productive and effective employees
Utility maximisation disadvantages?
The ‘trappings of power’ may be expensive and unnecessary
Social welfare advantages?
- In private firms, social welfare may be popular with customers, increasing sales
- Most public sector firms have social welfare as their objective
Social welfare disadvantage?
High opportunity cost of not earning more profit to be able to donate a large % of profit
Corporate Social Responsibility (CSR) advantage?
- CSR may be popular with customers
- CSR may lead to happier and some more productive employees
Corporate Social Responsibility (CSR) disadvantage?
CSR may be expensive and divert attention and effort away from more profitable endeavours
Profit satisficing advantage?
May prevent unscrupulous (unfair) though legal, behaviour that can lead to new legislation being imposed
Profit satisficing disadvantage?
-Leads to lower profits than are possible
Why may a firm want to profit maximise?
1) Re-investment
2) Dividends for shareholders
3) Lower costs and lower prices for consumers
Why may a firm not profit maximise?
1) Lack knowledge of MC and MR
2) Avoid greater scrutiny
3) Other objectives more appropriate
What is allocative efficiency?
At an output level where the Price equals the Marginal Cost (MC) of production.
P=MC
What is dynamic efficiency?
A firm which is dynamically efficient will be reducing its cost curves by implementing new production processes
LRAC and SRAC shifting down
What is productive efficiency?
A firm is said to be productively efficient when it is producing at the lowest point on the SRAC
What is X-inefficiency?
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.
Growth maximisation advantages?
Faster growth than sales volume maximisation
Growth maximisation disadvantages?
Lower profits than sales volume maximisation - profits will be negative (making a loss)
