The objectives of firms

Question 1

Who can the decisions of the owner of a firm influence

Answer 1

shareholders, directors and managers, workers and consumers.

Question 2

Who are shareholders

Answer 2

Shareholders hold shares in a company (means they own some percentage of the company.)

Question 3

state what shareholders get when a company makes profit

Answer 3

if a company makes big profit, its shareholders will take some percentage of the profit

Question 4

why do shareholders buy shares

Answer 4

buy shares in a company because they are willing to maximise profit

Question 5

Define directors and managers and state what they do

Answer 5

the people who run the business day to day.
- They organise workers, manage stock and handle marketing.

Question 6

What do directors and managers want to do/

Answer 6

want their company to do well but want to take home bonuses
- Bonuses are linked to how many sales a company makes. More sales = bigger bonus
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want to reduce their workload and increase their prestige and reputation.

Question 7

In a company what do workers care about

Answer 7

care about wages/ salaries, job security and working conditions.

Question 8

What do consumer scare about

Answer 8

care about customer service, low prices and social causes (like saving the environment and helping the poor).

Question 9

What do we assume about firms and state what happens in real life

Answer 9

We assume firms want to maximise profit (where MR= MC) BUT in real life, firms decision are influenced by worker, shareholders, director and mangers and owners.

Question 10

Objectives of a firm: revenue maximisation - state how directors and managers can increase their prestige and power

Answer 10

By increasing market share.
- if you control a larger percentage market share, your firm looks bigger and you are the manager/ director of a bigger, more powerful company = more monopoly power

Question 11

Objectives of a firm: revenue maximisation - what is market share usually measured by and describe

Answer 11

usually measured by revenue.
- The more revenue you have, the greater your market share = managers/ directors looking to increase their market share will look at maximising their revenue.

Question 12

Objectives of a firm: revenue maximisation - at what point will revenue maximisation occur at and what does this means (state what this means for the long run aswell)

Answer 12

whereMR = 0
- means there is no more revenue to be gained, revue has been maximised / market share can increase
- in the long run can overpower the market and make greater profits in the long run

Question 13

Objectives of a firm: define sales maximisation

Answer 13

Sales maximisation is when the firm aims to sell as much of their goods and services as possible without making a loss

Question 14

Objectives of a firm: what condition does there have to be for sales maximisation to occur at

Answer 14

AR=AC

Question 15

Objectives of a firm: why would managers and directors try and maximise sales

Answer 15

because their bonuses are linked or how many sales they make.

Question 16

Objectives of a firm: define profit satisficing

Answer 16

when a firm makes enough profit to satisfy its shareholders, happy with their return, workers to be happy with their wage and other influencers.
But after satisfying its influencers, the firms may decide to peruse, environmental, social or personal objectives - whatever matters to the firm

Question 17

Objectives of a firm: state why a firm may want to grow as an objective and state an example (Apple)

Answer 17

growth can mean more sales and profit.
- EXAMPLE: Apple had grown in 1976 from a slew of a few computer to in 2016 £53bn of sales = profit

Question 18

Objectives of firms: state a negative argument for growth as an objective of firms and state an example (Apple)

Answer 18

some firms might lack the finance to expand.
- investment is hard to raise and banks are often unwilling to lend money to smaller firms because there is a high risk of not paying back.
- EXAMPLE: Apple were fortunate to get $90,000 investment and $250,000 loan. This money helped them expand,

Question 19

Objectives of a firm: state an example for increased market share/ revenue maximisation (Apple)

Answer 19

2010 Apple was able to secure 83% of the tablet market. As a result, Apple became the dominant tablet producer with lots of market power. This enables Apple to increase the prices of its iPads and make supernormal profit.

Question 20

Objectives of a firm: state a negative argument for increased market share/ revenue maximisation and state an example

Answer 20

regulations can prevent firms from growing too big because of concerns over consumer exploitation.
- EXAMPLE: 2016, three mobile tired to grow bigger by buying O2, but regulators prevented three mobiles purchase because regulators were worried that after buying O2 thee would have too much market power and might use it to exploit consumers at lower prices.

Question 21

Objectives of a firm: describe how a firm may exploit economics of scale

Answer 21

growth can help firms exploit other economies of scale - internal economies of scale (e.g. technical and marketing) By increasing output, firms can reduce their LRAC.
(Richards mum files past the moon)

Question 22

Objectives of a firm: state a negative argument for exploiting economies of scale

Answer 22

firms might be worried aboutinternal diseconomiesof scale (ABC) = will increase LRAC and decrease a firms profit = may deter a firm from growing.

Question 23

Objectives of a firm: why might it bad to assume all firm want to profit maximise

Answer 23

other owners might just want a quiet life running a small firm. Rather than profit maximising, these owners might want to profit satisfice.

Question 24

Describe what divorce of ownership and control is

Answer 24

To make a firm grown, owners may sell shares in the company to make more money for expansion. As more and more shares are sold to shareholder, you loose more and more ownership to the company
- despite less ownership, the owner will still in control as CEO, managing and running the business.

Question 25

What may the divorce of ownership and control lead to

Answer 25

the principle agent problem

Question 26

Define the principle agent problem

Answer 26

when the agent (e.g. the manager who runs andcontrolsthe business) pursues different objectives to the principal (e.g. the shareholders whoownthe business)

Question 27

What happens in the principle agent problem

Answer 27

the agent (the managers) should be running the business to maximise profits for the principle (the shareholders) - they want to control a bigger company
- But, the principle doesn’t know what the agent is doing and this is because of Asymmetric information (the shareholders don’t know everything the mangers are doing), so the mangers can make decisions that maximise their own objectives rather than maximising shareholders profits
- There is a conflict between the managers objectives and the shareholders objectives

Question 28

State the 5 main objectives of a firm

Answer 28

• growth
• sales maximise
• profit satisficing
• exploit economies of scale
• revenue maximising and increased market share