T1 - Scarcity, Choice and Potential Conflicts Flashcards
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What is the Economic problem?
Scarcity of resources, we need to make a choice. Either opportunity cost (Left or Right) or Trade-off (What proportion of each, 40% of one + 60% of other)
What is profit maximisation?
Often main objective of firm, MC = MR, profit = difference between TR and TC, they break even when TR = TC
Benefits of profit maximisation?
Greater wages and dividends (funds from shares) for entrepreneurs
Retained profits are a cheap source of finance (won’t have to pay high interest rates on loans)
In the short run, interests of the owners or shareholders are most important, since they aim to maximise their gain from the company.
Some firm profit maximise in the long run since will provide a stable price and output.
Sales Maximisation
Growth creates stability, more chance to survive, increased market share can increase profitability.
Satisficing
Achieving ENOUGH profit instead of maximum, may have other objectives
Survival
Personal satisfaction, important in hard times
Market share
Percentage of total market supplied by one business, stability and security, consumers may value leading business
Return on investment
Finance is important (capital equipment, labour, FOP), important if business loans
Social objectives
May need profit, not maximising employee welfare, customer satisfaction (may purchase more) CSR (Corporate Social Responsibility)
Cost efficiency
Helps compete, better efficiency = cut production costs
Stakeholder (economic agent)
Interest in how business is run/involved in business
Shareholder
Legal owner of business
Creditor
Who business owes money to
Stakeholder objectives?
Employee welfare
Environment issues
Market power
Customer satisfaction
Stakeholder conflicts
Cut jobs to reduce costs
Increase capacity with extra shifts
Replace manual work with machines
Increase selling price for profit
