2 - Objectives of Firms - Perfectly Competitive Market Flashcards
(42 cards)
Total Revenue Formula
Units of output x price
If price remains the same, what happens to MR and AR?
They stay the same.
Are Price and AR the same or different?
Same.
What is MR?
The addition to revenue after adding one extra unit.
AR formula?
TR / Units Sold.
What can profits be used to judge?
Success of a firm
Where will a firm produce to maximise profit? (PROFIT MAXIMISATION)
Where MC = MR (shouldn’t produce beyond this else will be making loss)
If a firm s producing on MC = MR, what kind of profit are they making??
Normal Profit.
What is Normal Profit?
This is the when the firm is making just sufficient profit to continue producing that good/service.
What will a firm do if they are not making normal profit?
Leave market/transfer resources to a market where normal profit can be obtained.
What is supernormal profit?
More than the profit required that ensures the supply of a good
What is subnormal profit?
Less than that is required to ensure the supply of a good.
What are an economists view of normal profits?
1) covers the opp cost of all factors used in the process
2) Amount of profit necessary to keep factor in present occupation
What are an economists view of supernormal profits?
1) Returns are above NP’s
2) Provides incentive for firms to enter the industry
3) Signals to entrepreneurs to allocate more factors to that market.
What are an economists view of sub normal profits?
1) Indicates oversupply
2) Firms may reallocate resources elsewhere.
What is the traditional view of a firms interest and why has it changed?
Profit Maximisation
it has changed due to them having to consider things like environmental problems else they’ll lose consumers.
Role of shareholders? And what are the problems with managers?
They want to profit maximise and therefore appoint managers.
however these managers may have different objectives - their own salaries.
What is satisficing?
This is when a firm does not profit maximise and settles for a satisfactory return
Why may a firm satisfice?
- To avoid a hostile bid/takeover
- Because theyre being socially responsible (carbon footprint etc)
What is sales maximisation theory?
Producing to where MR=0 therefore revenues are being maximised.
(read flashcard about why firms do this._
Why may firms be unable to profit maximise?
There may be problems with the information the firm needs to profit maximise.
Eg time lag between processing info therefore decision may be made too late.
What is organisational theory?
Argues that a firm will satisfice when it purses a number of goals.
What is cost plus pricing?
Firm doesn’t aim to maximise
They set the price = AC (normal profit) plus a conventional mark up.
Therefore level of prices = AC + mark up.
Long Run Profit Maximisation ?
Sales and growth are key to future profits and managerial security.
Therefore firms wont embark on risky SHORT TERM ventures.
