Objectives of firms Flashcards
What is the profit maximisation objective for firms ?
Firms strive to make a profit over everything else
When Marginal cost = Marginal revenue
Why do firms want to be profit maximisers ?
So they can reinvest back into the business to buy new capital + RnD
Dividends for shareholders / incentivises more investment from them
Lower costs and prices for consumers for being more competitive
Reward for entrepreneurship
Draw the profit maximisation diagram
What does profit satisficing mean mean ?
Sacrificing profit to satisfy as many key stakeholders as possible
What stakeholders are impacted by profit satisficing ?
Shareholders get higher dividends
Managers get bigger bonuses
Consumers get higher prices
GOVT dont like high prices + low wages
What is revenue maximisation ?
When firms aim to maximise sales as much as possible
Draw the Revenue maximisation diagram
Where does revenue maximisation occur ?
Marginal revenue = 0
Why do firms want to be revenue maximisers ?
Gain economies of scale to get greater growth and lower average costs
Predatory pricing drives out competitors
Principle agent problem - divorce between ownership and control - managers decide to rev max to please shareholders for their own benefit / greater perks
Why do firms want to be sales maximisers ?
To gain economies of scale
limit pricing and limit competition
Principle agent problem
Flood the market , consumers become aware / loyal to the product
What are some other aims of firms ?
Survival
Public sector organisation
Corporate social responsible
Where do sales maximisation occur ?
Average cost = Average revenue
