Obnectives Of Firms Flashcards
What are the main objectives of firms?
1) Profit maximisation
2) Profit satisficing
3) Revenue maximisation
4) Sales maximisation
What is profit maximisation?
Objective of firm to maximise profit (mc=mr)
Arguments of profit maximisation?
Allows for re investment, dividends for shareholders, lower costs and lower prices for consumers and reward for entrepreneurship.
But, knowledge of operating at exactly mc=mr, greater scrutiny, key stakeholders harmed and other objectives more appropriate (think cost cutting in dangerous areas) and potential environmental costs
What is profit satisficing?
Sacrificing profit to satisfy as many key stakeholders as possible
What do you need to profit satisfice?
Different stakeholders have different wants
Shareholder - profit
Managers - profit
Workers - don’t want profit
Government - don’t want profit
Environmental group - don’t want profit
What is revenue maximisation?
Output at which revenue is at at max (when mr=0)
Why do firms operate at revenue maximisation?
1) economies of scale (increasing output allows fixed costs to be spread)
2) predatory pricing
3) ‘principle agent problem’ divorce between ownership and control
What is sales maximisation?
Maximising sales operating at AC=AR
Why sales maximise?
1) EOS
2) Limit pricing
3) principle agent problem
4) flood the market
5) survival
What are the types of barriers to entry?
Legal , technical, strategic and brand loyalty
What are legal barriers to entry?
1) Patents
2) permits
3) Red tape
4) standards and regulation
5) insurance
What are technical barriers to entry/exit?
1) start up costs
2) sunk costs
3) economies of scale
4) natural monopoly
What are strategic barriers to entry/exit
1) Predatory pricing
2) limit pricing
3) heavy advertising
what is the economics agent problem?
1)Reasons In large corporations, ownership is often separated from control. Shareholders (owners) may not be involved in day-to-day management, which is handled by hired managers
2)Consequences: This separation can lead to conflicts of interest, known as the principal-agent problem, where managers may act in their own interests rather than those of the shareholders
For example, executives may prioritize their own compensation or personal goals over maximizing shareholder value. In some cases, managers may make decisions that benefit themselves, such as investing in projects that boost their own reputation or power, rather than projects that are in the best interests of shareholders.
