Unit 3: Business Objectives Flashcards
What is meant by Behavioural Economics?
Behavioural Economics is a field of economics which looks directly at the way human behaviour and decision-making is modelled. It refers to how individuals react and make decisions when there are changes in the economy.
By integrating economics with psychology, economists can benefit from the experience psychology has in examining our behaviour. Many psychologists are teaming up with economists in an attempt to study human beings in the economic forum, the most recent team being the 2002 noble prize winners Daniel Kahneman + Vernon Smith.
For the first time, lab experiments are being used to provide serious empirical data for economists to study. These experimental economists use techniques borrowed from psychology to test human studies within a controlled environment. As methodology improves, such experiments are slowly going more credibility within the economic academia
Why don’t firms choose Profit Maximisation?
- They don’t know where MC = MR is
- Divorce between ownership and control may lead to other objectives (managerial aims) - conflict of interest
- Firms could be aiming for profit maximisation in the long run
What is Sales Maximisation?
The maximum level of output that can be produced without making a loss
AC = AR
Why do firms Sales Maximise?
Long term strategy to gain market share
Deters new entrants who have higher costs - puts off new potential competition
What is Revenue Maximisation?
The maximum level of out that can be produced, before total revenue starts to fall
MR = 0
Why do firms Revenue Maximise?
Managers may wish to max revenue to satisfy managerial aims (e.g. bigger perks, bigger bonuses, move to headquarters, etc)
What is Satisficing Behaviour?
This is when managers may behave in a certain way for a quiet life and therefore do not push for the profit maximising position
They do enough to keep shareholders off their backs (keep them satisfied). This is called satisficing behaviour, or profit satisficing because managers produce Satisfactory Profits, rather than maximum profits
