YEAR 2 BUSINESS OBJECTIVES Flashcards
What is an important objective for most firms?
Profit. Models considering traditional theory of the firm based upon the assumption firms aim to maximise profit.
What is profit?
The difference between total revenue and total cost.
A reward entrepreneurs yield when they take risks.
When does a firm break even?
When TR= TC
When does profit maximisation occur?
When the Marignal COST = Marginal REVENUE- each extra unit produced gives no extra loss or revenue.
When do profits increase?
When MR > MC
When do profits decrease?
When MC > MR
Why might some firms choose to profit maximise?
- Greater wages and dividends
- Retained profits = cheap source of finance so save paying high interest rates
- Provides stable price and output
Why are PLCs keen to maximise profit?
May lose shareholders if they do not receive high
dividends.
What type of objective may a PLC have to keep shareholders happy?
SHORT RUN profit maximisation
What is normal profit?
Minimum reward required to keep entrepreneurs supplying their enterprise. Covers opportunity cost. Happens when TC= TR where normal profit is included in costs of production.
What is abnormal/ economic profit?
Profit above normal profit which exceeds value of opportunity cost of investment into firm. When TR > TC
