3.2 Business Objectives

Flashcards on Business Objectives in Economics

Who could have control over a firm's motives?

Owners or shareholders, directors and managers, the workers, the state, consumers, and pressure groups.

According to neo-classical economics, what is the primary goal of firms?

Firms aim to profit maximise in the short run to maximize owner's returns.

If a firm produces less than where MC=MR, what will happen to profit if they produce more?

Producing more will increase profit since MR would be higher than MC.

According to William Baumol, what are managers most interested in?

Managers are most interested in revenue since their salary may depend on it.

To revenue maximise, where do firms produce?

They produce where MR=0.

According to Robin Marris, what do managers aim to maximize?

Managers aim to maximize the growth of their company.

In order to sales maximise, where do firms produce?

At P2Q2, where AC=AR.

What is the principal-agent problem?

Owners and directors will have different goals due to this problem.

What is profit satisficing?

They will make enough profit to keep owners happy while following other objectives, but not profit maximising.

Why do firms aim to profit maximise?

Firms aim to make the most profit possible, occurring at the point MC=MR. Can be useful to reinvest back into the company.

Why do firms aim to revenue maximise?

Firms aim to make the most revenue possible, occuring at the point MR=0. Can be useful to increase market share.

Why do firms aim to sales maximise?

Firms aim to sell as much as possible, occuring at the point AC=AR. Can limit competition by creating barriers to entry.

What does satisficing mean?

When firms aim to make enough profit to keep owners happy while following other objectives.

What is the formula for profit maximisation?

The profit maximisation point is where Marginal Cost (MC) equals Marginal Revenue (MR): MC = MR.

What is the formula for revenue maximisation?

Revenue maximisation occurs where Marginal Revenue (MR) equals zero: MR = 0.

What is the formula for sales maximisation?

Sales maximisation occurs where Average Cost (AC) equals Average Revenue (AR): AC = AR.

Profit Maximisation Diagram

The profit maximisation point is where MC = MR. This level of output is denoted by Q1 and price by P1. Firms produce at this level of output because at any other level, MC \neq MR. For example, producing less would mean MR > MC, so the firm could increase profit by increasing production.

Revenue Maximisation Diagram

The revenue maximisation point is where MR = 0. This level of output is denoted by Q2 and price by P2. In this case, the firm does not make normal profits.

Sales Maximisation Diagram

Firms produce where AC = AR. This level of output is denoted by Q3 and price by P3. At this level of output the firm is making normal profits.