profit and loss + business objectives (L5 + L6) Flashcards
profit
revenue-costs
normal profit
average revenue=average costs
economists pov of profit
include opportunity and physical (fixed+variable costs) when calculating profit
accountant pov of profit
considers just explicit (variable+fixed costs)
supernormal profit
gain average revenue > average costs
subnormal profit
loss average revenue < average costs so firm would close down in the long run, profit below normal profit
how do the lines for marginal and average revenue look when the price revenue is imperfect?
MR is twice as steep
why is revenue maximised on the curve when MR is 0?
if MR is positive, then TR will be increasing so when it’s 0, that’s the max.
why would firms want to maximise profits?
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
where is profit maximised and why
MC=MR
as long as MR is increasing, profit is still being made
why may firms not profit maximise
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
shut down point
when the firm doesn’t cover the average variable costs so makes no contribution to fixed costs
short run shut down point
when price is below AVC
long run shutdown price
when price is below AC
when is revenue maximised
MR=0
why would shareholders not be too happy about this
profits fall as prices go down to increase revenue, if they have enough control over the firm they may insist on a minimum profit
what is profit satisficing
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
why would firms maximise revenue?
tactic to drive out competitors through predatory pricing, due to principle agent problem/managerial objectives
when are sales maximised?
AC=AR
why maximise sales?
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.
when is managerial utility maximised
when salaries are increased, larger fringe benefits (company cars etc) revolves around their own utility and satisfaction
satisficing
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.
what can firms do to engage in socially beneficial activities
avoid polluting . being good to the environment
support human rights
art sponsorships
donating to charity
why is corporate social responsibility important
consumer knowledge of the ethical issues in a business will mean they’ll stop buying from them, causing cuts in the firms revenue.
