profit and loss + business objectives (L5 + L6)

Question 1

profit

Answer 1

revenue-costs

Question 2

normal profit

Answer 2

average revenue=average costs

Question 3

economists pov of profit

Answer 3

include opportunity and physical (fixed+variable costs) when calculating profit

Question 4

accountant pov of profit

Answer 4

considers just explicit (variable+fixed costs)

Question 5

supernormal profit

Answer 5

gain average revenue > average costs

Question 6

subnormal profit

Answer 6

loss average revenue < average costs so firm would close down in the long run, profit below normal profit

Question 7

how do the lines for marginal and average revenue look when the price revenue is imperfect?

Answer 7

MR is twice as steep

Question 8

why is revenue maximised on the curve when MR is 0?

Answer 8

if MR is positive, then TR will be increasing so when it’s 0, that’s the max.

Question 9

why would firms want to maximise profits?

Answer 9

reinvest in capital etc for the firm
pay more dividends to shareholders as without them the company may not even exist
lower costs to lower prices
reward for taking risks

Question 10

where is profit maximised and why

Answer 10

MC=MR

as long as MR is increasing, profit is still being made

Question 11

why may firms not profit maximise

Answer 11

they may not know that MC=MR is when profits are maximised
avoid regulators checking their firm, if there’s a lot of profit they will check
key stake holders could be harmed by this objective

Question 12

shut down point

Answer 12

when the firm doesn’t cover the average variable costs so makes no contribution to fixed costs

Question 13

short run shut down point

Answer 13

when price is below AVC

Question 14

long run shutdown price

Answer 14

when price is below AC

Question 15

when is revenue maximised

Answer 15

MR=0

Question 16

why would shareholders not be too happy about this

Answer 16

profits fall as prices go down to increase revenue, if they have enough control over the firm they may insist on a minimum profit

Question 17

what is profit satisficing

Answer 17

sacrificing profit to satisfy managers so not thinking of prices consumers want, wages may be lower, unhappy gov, environment may not be considered by the company

Question 18

why would firms maximise revenue?

Answer 18

tactic to drive out competitors through predatory pricing, due to principle agent problem/managerial objectives

Question 19

when are sales maximised?

Answer 19

AC=AR

Question 20

why maximise sales?

Answer 20

for economies of scale
to limit pricing (less competition this way)
principle agent problem
survival objective in order to gain loyal customers before changing objective eg mcdonalds
important to show social responsibility as consumers being aware of ethically produced products means they’re more likely to buy it.

Question 21

when is managerial utility maximised

Answer 21

when salaries are increased, larger fringe benefits (company cars etc) revolves around their own utility and satisfaction

Question 22

satisficing

Answer 22

separate groups in the firm will have different objectives that may be placed in a hierarchy so the outcome will be satisfactory rather than optimal.

Question 23

what can firms do to engage in socially beneficial activities

Answer 23

avoid polluting . being good to the environment
support human rights
art sponsorships
donating to charity

Question 24

why is corporate social responsibility important

Answer 24

consumer knowledge of the ethical issues in a business will mean they’ll stop buying from them, causing cuts in the firms revenue.