3.2 Flashcards
(16 cards)
What is Total Revenue?
It is the price multiplied by the quantity sold.
What is total cost?
It is the cost of producing a given level of output. It is calculated by adding the total fixed costs to the total variable costs.
What is marginal revenue?
It is the increase in revenue that results from the sale of one additional unit of output.
What is marginal cost?
It is the increase in cost of producing an additional unit if output. Mc is always positive.
What is Marginal profit?
It is the extra profit gained from selling one more unit. When marginal profit is 0 the firm is maximising profit.
Marginal profit = MR - MC
What is profit maximisation?
Where MR = MC, it is the output at which the difference between TR and TC is the greatest.
Why would firms profit maximise?
1- Reinvestment: profit goes back into the business in the form of new capital.
2- Greater dividends for shareholders
3- Rewards entrepreneurship
4- Profit maximisation drives efficiency, which in turn helps firms lower costs and stay competitive in the long run.
Why would firms not profit maximise?
1- They dont know there MC and MR.
2- To avoid scrutiny: high profits may cause regulation authorities to look into the business and potentially increase costs.
3- Key stakeholders may be harmed: it leads to cost-cutting, exploitation, or neglect of social responsibility, all in pursuit of higher profits.
4- Firms may choose other objectives that are more appropriate.
When MR > MC, what is the effect on profit?
Profit is increasing. The next good will always generate more profit.
When MR < MC, what is the effect on profit?
Profit is decreasing, as costs are higher than revenue thus additional output is making a loss and is reducing production
What is revenue maximisation?
When MR = 0
Why would a firm Revenue maximise?
1- To benefit from economies of scale
2- Predatory pricing: where a firm undercuts a competitor at the expense of profit.
3- Principle agent problem: managers may benefit from increased revenue.
When does sales maximisation occur?
When AR = AC, a firm sells as much as possible subject to the constraint that it at least makes normal profit.
Why might a firm follow a sales maximising strategy?
1- To increase market share and eliminate competitors by cutting it price.
2- To avoid the attention of competition authorities.
3- To deter new firms from entering the market as a high profits attract firm.
4- To grow fast and benefit from economies of scale
What is satisficing?
Where firms abandon the idea of maximising anything. It implies setting an acceptable level for each goal of the business.
Why would firms have the objective of satisficing?
1- Some firms aim to make just enough profit to keep shareholders happy and then pursue other objectives.
2- The characteristics of the owner or manager are reflected in the objectives of a firm.
3- Firms may wish to keep profits low to avoid being taken over by other firms.
4- This objective is likely to be followed when there is a separation of ownership and control in which shareholders and managers have different objectives.
