theme 3- 3.2 business objectives

Question 1

total revenue (TR)

Answer 1

the price x quantity sold

Question 2

profit maximisation

Answer 2

assumption = all firms try to make the most profit possible, BUT not all profit maximise
is either:
1. the output at which the difference between TR and TC is greatest
2. the output at which MR = MC

Question 3

total cost (TC)

Answer 3

cost of producing at a given level of output
in the short run = total fixed cost + total variable cost

Question 4

marginal revenue (MR)

Answer 4

change in TR from selling one more unit of output
is the gradient of the TR curve

Question 5

marginal cost (MC)

Answer 5

the extra cost of making one extra unit of output
is always +ve
is the gradient of the TC curve

Question 6

marginal profit

Answer 6

the extra profit gained from selling one more unit
when marginal profit = 0, the firm is maximising profit
marginal profit = MR - MC

Question 7

why profit is maximised when MR = MC

Answer 7

if in selling another unit the cost is greater then the revenue received, marginal profit is -ve
when MC = MR, the firm reaches equilibrium

Question 8

revenue maximisation

Answer 8

is either:
1. the output at which TR is at maximisation
2. the output at which MR gained is 0
in this case, the firm cuts its price down to the point where extra revenue from selling another unit is balanced by the reduced price on the items it is already selling

Question 9

circumstances where revenue maximisation may be rational

Answer 9

• if a firm has to dispose of its stock, then costs are irrelevant
• if a business is owned and managed by different people, may be different objectives e.g. bonuses paid according to revenue

Question 10

sales maximisation

Answer 10

is either:
1. the output at which TC = TR
2. the output at which AR = AC
occurs when a firm sells as much as possible subject to the constraint that it at least makes normal profit

Question 11

reasons for sales maximisation

Answer 11

• to increase market share and eliminate competition by cutting its price (may be short run)
• to avoid the attention of the competition authorities (large profit = investigation)
• to deter new firms from entering the market

Question 12

satisficing

Answer 12

abandons idea of maximisation
sets an acceptable level for each goal of the business to be achieved simultaneously

Question 13

reasons for satisficing

Answer 13

• human intentions
• followed when there is separation of ownership and control
• characteristics of the owner/manager in the objectives of the firm
• keep profits down to avoid takeover
• make enough profit to appease shareholders then focus on other goals (profit satisficing)