1.5.2 The objectives of firms 2024

Profit Maximisation

The objective of firms to attain the highest level of profit available in the production of goods and services.

Profit Satisficing

A level of profit that satisfies the needs of owners or managers, which is below the maximum profit.

Sales Maximisation

An objective where firms seek to achieve the highest possible level of sales without making a loss.

Revenue Maximisation

The objective to maximize sales revenue, occurring at the point where marginal revenue equals zero.

Divorce of Ownership from Control

When the owners of a business do not run it, leading to potential conflicts of interest.

Principal-Agent Problem

A situation where the interests of the principal (shareholders) conflict with those of the agent (managers).

Marginal Cost (MC)

The cost of producing one more unit of a good.

Marginal Revenue (MR)

The additional revenue gained from selling one more unit of a good.

Market Share

The portion of a market controlled by a particular company or product.

Corporate Social Responsibility (CSR)

A business model that helps a company be socially accountable to itself, its stakeholders, and the public.

Survival as a Business Objective

The goal of a business to remain operational, especially during challenging times or for new firms.

Growth Objective

The aim of established businesses to increase their market share or overall size.

Fixed Costs

Costs that do not vary with the output produced.

Variable Costs

Costs that vary directly with the level of output.

Short-run Decisions

Business choices made based on current operational and market conditions.

Long-run Decisions

Business decisions that consider future goals and broader market trends.

Oligopolistic Market

A market structure dominated by a small number of large firms.

Employee Share Ownership Schemes

Programs allowing employees to purchase shares in the company, aligning their interests with shareholders.

Stock Options

Contracts that let an employee buy company stock at a predetermined price.

Price Elasticity of Demand (PED)

A measure of how much the quantity demanded of a good responds to a change in price.

AR (Average Revenue)

The revenue earned per unit sold, calculated as total revenue divided by quantity sold.

AC (Average Cost)

The total cost of production divided by the number of units produced.

Objective Evaluation

The process of assessing the effectiveness and relevance of a firm's goals.

Profit Maximisation Occurrence Point

Occurs where marginal revenue equals marginal cost (MC = MR).

Revenue Maximisation Occurrence Point

Occurs where marginal revenue equals zero (MR = 0).

Sales Maximisation Occurrence Point

Occurs when average revenue equals average cost (AR = AC).

Corporate Governance

The system of rules, practices, and processes by which a company is directed and controlled.