Objectives of firms

Question 1

Define normal profit

Answer 1

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

Question 2

Equation for profit maximisation

Answer 2

Marginal cost= marginal revenue (profit=0)

Question 3

equation for sales revenue maximisation

Answer 3

Marginal revenue=0, any additional sales will result from lowering prices

Question 4

equation for sales volume maximisation

Answer 4

Average cost= average revenue

Question 5

What is assumed about firms and what do unit cost and revenue curves tell us about profit maximisation

Answer 5

We assume firms are looking to maximise profits. Unit cost falls with output and then rises again, whilst marginal revenue falls with output (demand curve slopes down). There will be a point at which output should not be increased because unit costs begin to rise again and profit is not maximised

Question 6

Explaining maximise sales revenue

Answer 6

Maximising sales revenue is where marginal revenue=0. Production has reached a point where to sell additional units the price of all units has to be lowered, and so overall revenue falls

Question 7

Explaining sales volume maximisation

Answer 7

Sales volume maximisation is where average cost is equal to average revenue. To increase sales further costs will rise, bringing average costs up above average revenue, and you will start producing at a loss.

Question 8

Explaining maximising growth

Answer 8

Maximising growth by increasing market share and the size of the firm. Cutting prices below costs may lead to making a loss in the short term, but this increased brand recognition may encourage growth in the long term.

Question 9

Which objectives are likely to be short term and long term

Answer 9

Profit maximisation is a long term objective, as they may make losses in the short term to increase growth.
Sales volume maximisation and revenue maximisation may be short term objectives used to gain market power.

Question 10

Realistic assumptions about firms (information and multi product businesses)

Answer 10

Information- businesses know their costs and revenue based on market decisions, so are best placed to calculate where MC=MR
Multi-product business- a business may only make one product such as a cement mixing company

Question 11

Unrealistic assumptions about businesses (imperfect information and multi product businesses)

Answer 11

Imperfect information- hard for businesses to pinpoint precise profit maximising outputs as they cannot accurately calculate MR and MC
-day to day pricing based on estimated demand

Multi-product businesses- most businesses are multi product firms in a range of markets. Vast volume of information whilst keeping track of changing customer preference

Question 12

Advantages of sales revenue maximisation, sales volume maximisation, and growth maximisation

Answer 12

SRM= faster growth than profit maximisation due to higher market share. Gives large firms easy access to finance

SVM= faster growth than SRM

Growth maximisation= faster growth than SVM

Question 13

Disadvantages of SRM, SVM, and GM

Answer 13

SRM= lower profits than profit maximisation

SVM=lower profits than SRM

GM= making a loss