3.2.1 Business Objectives

Question 1

Business objectives

Answer 1

• profit maximisation
• revenue maximisation
• sales maximisation
• satisficing

Question 2

Business objective: profit maximisation

Answer 2

MC=MR
- the assumption of rationality
- as shareholders will be motivated by maximising their dividend to maximise their profits from the company (assuming the firm wants to maximise profits)
- however, when pricing according to MR=MC firms may find they are loss-making

Question 3

The assumption of rationality

Answer 3

Shareholders will seek to maximise their utility by maximising profits

Question 4

Keynesian economist view on profit maximisation

Answer 4

• firms will try to maximise profit in long run rather than short run
• this is based on firms using cost-plus pricing (where firms calculate the average cost & adda mark-up)
• but rapid price changes = what consumer’s dislike since shows sign of desperation/distress-low price
• instead of changing price rapidly, they will continue to charge current price and make a loss in short term but will adjust the price to profit maximising point in the long term

Question 5

Profit maximisation graph

Question 6

Reason to profit maximise

Answer 6

• greater wages and dividends for entrepreneurs
• retain profits are a cheap source of finance, which saves paying high interest rates on loans

Question 7

Revenue maximisation graph

Answer 7

• prior to this point, MR is positive therefore adding to total revenue
• after this point, MR is neg therefore TR falls
• at point Q, P1, the firm is operating at MR = 0 where revenue maximises.

Question 8

Business objectives: revenue maximisation

Answer 8

• MR = 0 (each extra unit sold generates no extra revenue
• some managers will want to maximise utility by making as much revenue as possible

Question 9

Business objectives: sales maximisation

Answer 9

• AC = AR
• when the firm aims to sell as much of their g/s as possible with no. loss
• managers are often paid a salary that is linked to the amount of sales. So to maximise their own utility, they will seek to maximise sales so they can get increase salary.

Question 10

Business objectives: sales maximisation example

Answer 10

Amazon’s Kindle launch. They sold as mang Kindles as possible to gain market share, so they can earn more profits in long run

Question 11

Business objectives: satisficing

Answer 11

When it’s earning just enough profits to keep its shareholders happy

Question 12

Why is satisfying a business objectives?

Answer 12

• managers have different goals to shareholder (shareholders = profit maximisation = dividends, managers = increased salaries, availability of fringe benefits, no. ppl under their control
• therefore they might pursue goals other than profit maximisation. But if they ignore it, shareholder can vote out managers
• so managers will profit satisfy where they satisfy demands of shareholders
• once demands are met, managers can maximise their own rewards (do just enough to satisfy shareholders & avoid getting fired)
• managers are likely to give an outcome between profit max. & sales max.

Question 13

Graphs for MC, MR, AC and AR