3.2 Business Growth Flashcards
(12 cards)
What is profit maximisation?
Profit maximisation is when a firm produces at the level of output where marginal costs (MC) = marginal revenue (MR).
Define the term revenue maximisation.
Revenue maximisation is when a firm produces at the level of output where marginal revenue (MR) = 0.
True or false? Sales maximisation occurs at the level of output where average costs (AC) = average revenue (AR).
True.
What does satisficing mean?
Satisficing means settling for a level of output somewhere between profit and sales maximisation, often due to the principal-agent problem.
State the formula for profit maximisation.
Profit maximisation is at the output where: MC = MR
Which business objective often results in high prices for consumers?
Profit maximisation often results in high prices for consumers.
What is the connection between revenue maximisation and the principal-agent problem?
The principal-agent problem relates to revenue maximisation, as managers may prioritise maximising sales to increase their own commission. Profit maximising becomes less important to managers than owners.
What is the level output at which breakeven occurs?
The level output at which breakeven occurs is where average costs (AC) = average revenue (AR). This results in normal profit.
True or false? Firms always know their exact profit maximisation level of output.
False.
Define the term supernormal profit.
Supernormal profit is the difference between the selling price (AR) and the average cost (AC) multiplied by the quantity produced.
What is the relationship between marginal revenue and total revenue at the revenue maximisation output level?
At the revenue maximisation output level, marginal revenue (MR) = 0. This means selling another unit will not increase total revenue.
How do firms benefit from pursuing a revenue maximisation strategy in the short-term?
In the short term, firms may benefit from a revenue maximisation strategy by increasing output. This leads to greater economies of scale, which lower average costs. Prices could be reduced to compete more effectively.
