Theme 3.2 Flashcards
What is profit maximisation?
The difference between total revenue (TR) and total costs (TC) where a firm operates at the price and output that derives the greatest profit.
When does profit maximisation occur?
When marginal cost (MC) = marginal revenue (MR).
What happens to profits when MR > MC?
Profits increase.
What happens to profits when MC > MR?
Profits decrease.
List some reasons why firms choose to profit maximise.
- Greater wages and dividends for entrepreneurs
- Retained profits are a cheap source of finance
- Short run interests of owners or shareholders are prioritized
- Long run stability in price and output
What is revenue maximisation?
Occurs when marginal revenue (MR) = 0.
What is sales maximisation?
Aiming to sell as much as possible without making a loss.
Where does sales maximisation occur on a diagram?
Where average costs (AC) = average revenue (AR).
Give an example of sales maximising.
Amazon’s Kindle launch, where they sold as many Kindles as possible to gain market share.
What is satisficing?
Earning just enough profits to keep shareholders happy.
Why might managers choose to profit satisficing?
Their personal reward from profits is small compared to shareholders.
What occurs when there is a divorce of ownership and control?
Managers may opt to earn enough profits to satisfy shareholders while meeting other objectives.
