Objectives of firms-profit max, rev max, sales max, satisficing Flashcards
Why would firms want to profit maximize- shareholders?
Profit maximization MR=MC, One reason could be because they want to keep shareholders pleased so having high profits means shareholders can retain more dividends and be satisfied.
What could be another reason for profit maximization?
This could be due to investment opportunities, if the firm makes a profit they can re-invest back into the business instead of taking loans since the repayment on loans can be very expensive.
What could be another reason for profit max- greater efficiency, lower cost, and lower prices?
Now if firms want to profit maximize they will want to be the most efficient, now we know that profit= TR-TC, so if a firm is efficient they will want to minimise costs so lower cost means that consumers are also able to benefit through lower prices.
However what could be potential reasons why firms may not want to profit maximise?
Knowledge of MC=MR, some firms may not be aware of this as it’s really difficult to work out MC since finding OC can be difficult, so firms use another tactic where they work out the cost plus pricing-where they want to work out LRAC and put a margin to work out profit.
greater risk of investigations?
If firms are making continuous profit regulatory investigators come and check the firm’s tasks. For instance, if they see that there’s an exploitation of consumer
Profit satisficing?
Profit satisficing-this means when there’s an ownership of control there’s a conflict between what stakeholders want.
Stakeholders are broken down into central groups of people- owners, managers, workers, consumers, and gov.
owners are known as shareholders who own the company but they are not directly involved in the business.
What could be the objective of a manager?
they don’t own the company but they may want to consider the size of the business.
what could be the objective of workers?
they might want better working conditions like reduced working hours, greater breaks and greater holidays.
What could be the objective of consumers?
they want lower prices.
in the end how does profit satisficing come in?
Well what will happen is that since stakeholders all have different objectives the firm will still bring some sort of profit maximization but on the side they will try to meet other’s objectives.
What could be another objective of a firm survival?
In transport sectors where set up costs like machinery can be very expensive, there’s huge competition.
What could be another objective of a firm?
Revenue max- this is where MR=0
- the main objective of a firm is to set predatory pricing and drive out competition
- firms will want to drop prices even further so that other businesses will go out of business and consumers will come to these firms.
- another reason might be that some firms may grow in size so they might benefit from economies of scale.
What could be another objective sales max AC=MR?
Not making a loss or not making extra revenue is this firm’s goal
- Their main is to produce as much quantity as possible
- The size of the business is important because to experience economies of scale in the short run.
- then they can benefit from profit max in the long-run
- Also the manager’s salary is linked to the business because they may want to sale maximize so salaries can increase.
How would the concept of sales max curve look like?
x-axis-quantity y-axis- costs/revenue -Draw a AC curve -Draw D curve downwards -Draw MR curve downwards 1. Profit max is where MC=MR 2.Revenue max is where MR=0 3. Sales max is where AC=MR
where QREV is the gap where there’s some sort of profit maximization taking place, but if the line was to move higher it would actually cause a loss but that’s fine since it short term.
