Objectives of Firms and Efficiency

Question 1

Profit Maximisation

Answer 1

MC = MR
Aim to maximise return to shareholders and increase share price

Question 2

Sales Maximisation

Answer 2

AC = AR
Selling as much as possible without making a loss (normal profit)
Aim to increase brand loyalty and market share

Question 3

Revenue Maximisation

Answer 3

MR = 0
Still make some supernormal profit
Aim to increase brand loyalty and market share

Question 4

Profit Satisficing

Answer 4

Making enough money to satisfy different shareholders in the firm
Aim to solve the principle-agent problem

Question 5

Allocative Efficiency

Answer 5

AR = MC
Consumer and producer surplus is maximised
Aim to maximise allocation of resources for society so no welfare loss
e.g. Governments and Charities

Question 6

Productive Efficiency

Answer 6

MC = AC
Aim to lower LRAC in order to increase profit margin and to reach MES in the long run

Question 7

Dynamic Efficiency

Answer 7

Firms reinvest supernormal profit to innovate process and product
Aim to increase revenue and maintain or increase market share

Question 8

Benefits of innovation to the producer

Answer 8

Cost of production decreases meaning profits increase
Demand increases so revenue increases

Question 9

Benefits of innovation to the consumer

Answer 9

Lower prices

Question 10

X-inefficiency

Answer 10

Where firms use more inputs than they need to produce a good or a service
They are operating on a higher AC curve (not the lowest possible)
Tends to happen in monopolies + markets with little competition e.g. NHS