The objectives of firms Flashcards
Who can the decisions of the owner of a firm influence
shareholders, directors and managers, workers and consumers.
Who are shareholders
Shareholders hold shares in a company (means they own some percentage of the company.)
state what shareholders get when a company makes profit
if a company makes big profit, its shareholders will take some percentage of the profit
why do shareholders buy shares
buy shares in a company because they are willing to maximise profit
Define directors and managers and state what they do
the people who run the business day to day.
- They organise workers, manage stock and handle marketing.
What do directors and managers want to do/
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.
In a company what do workers care about
care about wages/ salaries, job security and working conditions.
What do consumer scare about
care about customer service, low prices and social causes (like saving the environment and helping the poor).
What do we assume about firms and state what happens in real life
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.
Objectives of a firm: revenue maximisation - state how directors and managers can increase their prestige and power
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
Objectives of a firm: revenue maximisation - what is market share usually measured by and describe
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.
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)
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
Objectives of a firm: define sales maximisation
Sales maximisation is when the firm aims to sell as much of their goods and services as possible without making a loss
Objectives of a firm: what condition does there have to be for sales maximisation to occur at
AR=AC
Objectives of a firm: why would managers and directors try and maximise sales
because their bonuses are linked or how many sales they make.
Objectives of a firm: define profit satisficing
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
Objectives of a firm: state why a firm may want to grow as an objective and state an example (Apple)
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
Objectives of firms: state a negative argument for growth as an objective of firms and state an example (Apple)
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,
Objectives of a firm: state an example for increased market share/ revenue maximisation (Apple)
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.
Objectives of a firm: state a negative argument for increased market share/ revenue maximisation and state an example
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.
Objectives of a firm: describe how a firm may exploit economics of scale
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)
Objectives of a firm: state a negative argument for exploiting economies of scale
firms might be worried aboutinternal diseconomiesof scale (ABC) = will increase LRAC and decrease a firms profit = may deter a firm from growing.
Objectives of a firm: why might it bad to assume all firm want to profit maximise
other owners might just want a quiet life running a small firm. Rather than profit maximising, these owners might want to profit satisfice.
Describe what divorce of ownership and control is
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.
What may the divorce of ownership and control lead to
the principle agent problem
Define the principle agent problem
when the agent (e.g. the manager who runs andcontrolsthe business) pursues different objectives to the principal (e.g. the shareholders whoownthe business)
What happens in the principle agent problem
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
State the 5 main objectives of a firm
- growth
- sales maximise
- profit satisficing
- exploit economies of scale
- revenue maximising and increased market share
