3.2 Business Objectives Flashcards
(13 cards)
What is profit maximisation?
A firm’s profit maximisation occurs when it operates at the price and output that derives the greatest profit, where marginal cost (MC) = marginal revenue (MR).
How is profit calculated?
Profit is calculated as total revenue (TR) minus total costs (TC).
What happens to profits when marginal revenue (MR) is greater than marginal cost (MC)?
Profits increase when MR > MC.
What happens to profits when marginal cost (MC) is greater than marginal revenue (MR)?
Profits decrease when MC > MR.
Why do some firms choose to profit maximise?
- It provides greater wages and dividends for entrepreneurs
- Retained profits are a cheap source of finance
- Short-term interests of owners or shareholders are prioritized
- Stability in price and output is preferred in the long run
What is revenue maximisation?
Revenue maximisation occurs when marginal revenue (MR) = 0, meaning each extra unit sold generates no extra revenue.
At what point does a firm operate at revenue maximisation?
A firm operates at revenue maximisation at the point where MR = 0.
What is sales maximisation?
Sales maximisation is when a firm aims to sell as much as possible without incurring a loss, occurring where average costs (AC) = average revenue (AR).
Provide an example of sales maximisation.
An example is Amazon’s Kindle launch, where they sold as many Kindles as possible to gain market share.
What is satisficing?
Satisficing is when a firm earns just enough profits to keep its shareholders happy, balancing profit with other objectives.
What does it mean for a firm to be profit satisficing?
A firm is profit satisficing when it earns enough profits to satisfy shareholders while pursuing other goals.
What is the relationship between shareholders and managers in a satisficing scenario?
In a satisficing scenario, managers may not aim for high profits because their personal reward from profits is small compared to shareholders’ dividends.
What is a key characteristic of firms that are profit satisficing?
There is a divorce of ownership and control.
