objectives of firms (micro)

Question 1

What are examples main objectives of firms?

Answer 1

1) profit maximisation

2) Sales maximisation/Increased market share/market dominance

4) social/environmental concerns

5) Profit satisficing

6) Co-operatives - non-profit

Question 2

What do higher profits mean?

Answer 2

• Higher dividends for shareholders
• More profit can be used to finance research and development
• higher profit makes the firm less vulnerable to takeover
• Higher profit enables higher salaries for workers.

Question 3

What is profit satisficing?

Answer 3

occurs where owners/shareholders of a business set a minimum acceptable level of achievement in terms of profit / return on capital - that managers need to achieve

Question 4

Why would firms aim to sale maximise?

Answer 4

To increase their market share - even if it means less profit.

Question 5

Why do firms try to increase their market share at the cost of less profit?

Answer 5

• Increased market share increases monopoly power and may enable the firm to put up prices and make more profit in the long run.
• Managers prefer to work for bigger companies as it leads to greater prestige and higher salaries.
• Increasing market share may force rivals out of business. E.g. the growth of supermarkets have lead to the demise of many local shops. Some firms may actually engage in predatory pricing which involves making a loss to force a rival out of business.

Question 6

What point is profit maximisation?

Answer 6

MC=MR

Question 7

What point is revenue maximisation?

Answer 7

MR=0

Question 8

What point is marginal cost pricing - allocative efficiency?

Answer 8

MC=AR

Question 9

What point is sales maximisation?

Answer 9

AR=ATC

Question 10

What is growth maximisation?

Answer 10

• firm will be willing to make lower levels of profit in order to increase size and gain more market share.
• More market share increase its monopoly power and ability to be a price setter.

Question 11

What is long run profit-maximisation?

Answer 11

firms sacrifice profits in the short term to increase profits in the long run.

Question 12

Give an example of long run profit maximisation?

Answer 12

investing heavily in new capacity, firms may make a loss in the short run but enable higher profits in the future.

Question 13

What is the objective of a co-operative?

Answer 13

• is run to maximise the welfare of all stakeholders - especially workers.
• any profit the co-operative makes will be shared amongst all members.

Question 14

What may firms with social/environmental concerns aim to do?

Answer 14

• choose products which don’t harm the environment
• products not tested on animals.
• May be worried about local community and charity concerns

Question 15

why may firms not profit maximise?

Answer 15

If a firm has a too large level of profit, this may result in the regulators’ investigating it. They may scrutinise the firm’s processes and ask to reduce prices to meet customers’ demands.

Sometimes, firms may not have a profit-maximisation objective as they are not able to ascertain their actual marginal cost and marginal revenue.

Other objectives may be more crucial for the firm over profit maximisation.

Question 16

what are benefits of pursuing revenue maximisation?

Answer 16

• Increase brand loyalty
• Greater influence - e.g. political agenda
• economies of scale