OBJECTIVES OF FIRMS: Profit maximisation Flashcards
where is perofit maximisation + draw
MC = MR
In traditional economci theory
we always assumr profit max is a firms main/primary obj
state the reasons why profit maximsaition would be pursued
Reinvestment
Dividends for Shareholders
Lower Costs
Reward for entreprenurshi
Explain how profit max helsp reinvestment
if big profits made you are able to reinvest back into the bs
through new/upgraded capital
technology
R&D
innovation
gve an example of companies who through profit maximisation could access reinvestment
pharma - johnson &johnson
electronic companies - apple
Explain how profit max helsp rdividends 4 sh
SH are owners of company w/o theit finance (through buying shares) there would be no companuy and so are to be rewarded with great dividends
what is a divend
share of profit
Explain how profit max helps lower costs
profit- tc-tr
so
bs will keep costs low to maintain high profit margins
as well as pass on lower costs to consumers through lower prices to get higher market share
Explain how profit max helsp reward entreprenurhsip
when a bs is strated up there has been entreprenurial and risk taking activity so there needs to be a reward for this initiative
Explain why profit max doesnt occurs at to the right of Qp (MC=MR)
any q to right not profit maxing
as costs greater than revenue
so units will be genreating a loss
therefore not making profit so cannot be maxing profit at this point
Why does profit max not occur to the left of MC = MR and where MR is highest
eventhough at point Mrevs so much higher than Mcosts
as long as MR > MC the next/every extra unit will gen more profit
therefore profit will icnrease
so logical place to stop’s when no more extra profit can be made :MC=MR
State why in the real world bs may decide not to profit max
no knowledge/ dont compute MC or Mr
Avoid scrutiny
key stkh could be harmed
other objectives more appropriate
Explain why a bs may not profit max to avoid crutiny
if making lrg profits comp authorities/regulators may look at bs and think doing suttin dodgy
for example working standards and conditions could be low/ taking shortcuts with costs
therefore they may investigate
in terms of avoiding scrutiny usually the outcomes of investigation arent
in the interest of bs
in terms of avoiding scrutiny usually outcomes of investigation arent in the interest of bs explain why
they may be forced to reduce prices
imporve health and safety and standards within the bs
use more enviro friendly methods of prod
so outcomes overakk increase costs/reduce rev streams
therefore dont profit max to avoid scrutiny
