The Objectives Of Firms Flashcards
Profit maximization is assumed
To be the objective of a firm.
Aiming for other objectives will
Reduce profit in the short run.
Maximising revenue means
Producing where marginal revenue = 0
Maximising sales means producing
Where average revenue = average cost
Maximising profit might
Only be an objective for the long run.
Maximising profit in the long run sometimes means sacrificing profit in the short run.
Some firms have
Alternative objectives
Some organisations are not for profit. Main aim is to do good.
Examples of alternative objectives
Firm may try to protect environment by using sustainable resources.
Firm may support local businesses by using suppliers in their region
Firm may choose to pay workers above standard market rate.
Divorce of ownership from control
Often happens as firms grow.
Divorce of ownership from control can lead to
The principle agent problem
The principle agent problem
This is where a principle (shareholder) pays for and agent (managing director) to act in their interests. But instead the agent acts in their own self interest.
Owners can retain control with
Accountability and incentives.
Sometimes people satisfice rather than
Maximise to make life easier.
Satisfice means
Trying to do just enough to satisfy important stakeholders.
