Objectives of firms Flashcards
total revenue d
what the firm receives for the sale of its product
how do you work out total revenue
price x number sold
how do you work out average revenue
total revenue divided by number sold
when is there profit
when total revenue is greater than total costs
marginal revenue d
the addition to total revenue from the production of one extra unit
which curve is the demand curve
average revenue
how do you work out MR
difference in total revenue divided by difference in output
what is the point of revenue maximisation
when MR = 0
why does total revenue fall beyond MR = 0
because marginal revenue is negative so extra units reduce total revenue
what is assumed about firms
that they always try to maximise profits
what is the point of profit maximisation
where MC = MR
why is MC = MR the point of profit max
because beyond that the addition of an extra unit adds more to costs than revenue so profits will fall
total profit d
total revenue minus total costs
normal profit d
the amount required to keep a factor employed in its present activity in the long run
what does normal profit include
opportunity cost of using any factor of production
supernormal profits
a return above normal profit, surplus payment
what are supernormal profits an incentive for
firms to enter the industry
what can supernormal profits indicate
a lack of competition in the industry
what can negative or falling profits indicate
oversupply
satisficing d
the firm is producing satisfactory but not maximum profit
what is in the interests of shareholders
keep costs as low as possible and maximise profits
what is the divorce of ownership and control
shareholders own the business and want to maximise profit however managers may have different interests
director d
an individual elected by a company’s shareholders to set corporate policies
what may directors and managers be more concerned with
job security, larger salary (size of business) and other ‘perks’
why may directors not just be focused on profit
income from the directorship will make a larger contribution to their income than dividends, salaries more determined by size of business than profit
dividends d
financial return from the ownership of shares
what is an evaluation point for divorce of ownership
activist shareholders becoming more common and shareholders have to be faced at AGM
annual general meeting d
annual meeting where shareholders can discuss the accounts and elect directors
activist shareholders d
shareholders that will clamour for greater dividends and may mobilise other shareholders to oppose management
what may a firm that is satisficing do
produce a range of outputs that are within its target level of profits
can you show satisficing on a diagram
yes, quantity on x, profit on y, upside-down smiley face
stakeholders d
firms, organisations or individuals with an interest in the firm
what do some large businesses now include in their objectives
social responsibility
what is social responsibility
caring more about stakeholders, carbon footprint, corporate citizenship
corporate citizenship d
indicates that organisations embrace sustainable development
why is social responsibility not always costly
good staff easier to attract so costs of staff turnover reduced
what does sales maximisation theory say
managers want the firms they work for to be as large as possible because it is prestigious
why would managers want to work for large companies
salary, share options as well as prestige and perks, sales-related bonuses
why may a business not just maximise profit
may want increased market share and power
why may managers not maximise profit
risky ventures may end in job loss, increase in sales leads to managerial security
rational choice theory d
where all costs and benefits are considered before a decision is taken
why may a firm be unable to maximise profit
firms lack the information required to know the optimum output. waste of time and resources experimenting to find optimal output
what is cost plus pricing
where the firm sets its price equal to average cost plus a conventional mark up (say 25%)
does cost plus pricing conflict with maximising profits
doesn’t have to if the mark up is set to maximise profits (however most firms don’t do at profit max)
why may firms not react to every shift in the market
they may lose brand loyalty due to perceived avaricious behaviour, cost of changing price lists and brochures
what is the concept of long run profit maximisation
sales are the key to growth and growth the key to future profits
internal / organic growth d
using profits or loans to finance expansion by increasing the number of both fixed and variable factors within the firm
what are the two ways a firm can grow internally
extending an organisation’s geographic reach and expanding into new products
why may organic / internal growth be difficult
market may be saturated and lack of profit may impede growth
external growth d
a way for firms to rapidly expand by acquisitions and mergers
do firms always merge amicably
no there may be a hostile takeover where the management of the target firm resists the advances of the buyer but is forced to accept by its current owners
what are the four main types of mergers
horizontal integration, vertical integration, conglomerate merger, lateral merger
horizontal integration d
where two firms at the same stage of production combine
example of horizontal integration
paddy power betfair
vertical integration d
where firms at different stages of production combine
example of vertical backward integration
a brewery integrating with hop growers
what is vertical backward integration
where a firm combines with a firm in the previous process
what is vertical forward integration
combining with the next process
example of vertical forward integration
brewery taking over public houses
conglomerate merger d
where firms with no obvious connection combine
why may firms conglomerately merger
to diversify and reduce risk exposure
lateral merger d
a type of horizontal merger where there are some similarities between the businesses
are mergers often successful
no there are often diseconomies of scale in terms of people issues, such as leadership, poor communications and the company’s ability to change
what may firms consider when growing externally
time constraints, cost, the acquisition of a brand which is only available through external takeover, asset stripping
why may companies consider time constraints when considering growing externally as opposed to internal growth
external expansion is more rapid than internal growth
why may companies consider cost when considering growing externally as opposed to internal growth
it may be cheaper to buy out another firm than to undertake new investment
why may companies consider asset stripping when considering growing externally as opposed to internal growth
the predator may be able to sell the firm’s assets for more than it paid for them
what are the three components of technological progress
more output produced with same inputs, existing outputs undergo improvements in quality, completely new products available
