3.2.1- Business Objectives

Question 1

What are business objectives that firms can undertake?

Answer 1

• Profit Maximisation
• Sales Maximisation
• Revenue Maximisation

Question 2

How do firms profit maximise in the short run?

Answer 2

• Firms produce where MC=MR

Question 3

Why may some firms aim to profit maximise?

Answer 3

• Firms can generate funds for investment, which can help them survive a slowdown during a recession.
• There can still be dividends for shareholders, which keeps them investing.
• Lower costs, which could lead to lower prices for consumers, helping there to be an increase in customers (especially price sensitive ones)
• Reward for entrepreneurship

Question 4

What do firms do to achieve revenue maximisation?

Answer 4

• When MR=0
• Here, each extra unit sold generates no extra revenue.

Question 5

What are the reasons for revenue maximisation?

Answer 5

• Predatory Pricing: This is to drive out competition/ gain market share.
• Economies of Scale: The cost advantages companies gain from increasing their output.
• Lower prices and higher sales can help firms with high fixed costs gain economies of scale.

Question 6

How do firms achieve sales maximisation?

Answer 6

• AC=AR
• Firms will want to get the highest level of sales possible without making a loss.
• Here firms will want to ensure sufficient returns to keep the owners happy, so they will aim for normal profits.

Question 7

What are the reasons for sales maximisation?

Answer 7

• To flood the market: This is to generate a larger market share. This is as by flooding the market, a firms can achieve a higher competitive advantage, as they are establishing a larger presence in the market.
• Limit pricing: Not as low as predatory pricing, but this is to limit competition.

Question 8

What is profit satisficng?

Answer 8

• When a business aims to make a satisfactory level of profit rather than maximising profit
• Occurs where there is a separation of ownership and control
• Also known as the Principal Agent Problem

Question 9

What is the principal agent problem?

Answer 9

• Shareholders (principals) often do not get involved in running the business.
• This is a problem as shareholders may want to maximise profit, wheres as managers might not focus on profit as much as shareholders as managers do receive the same rewards as shareholders (dividends).

Question 10

What are other aims?

Answer 10

• Managerial Utility Maximisation
• Marginal Cost Pricing/ Allocative Efficiency

Question 11

What is the theory managerial utility maximisation?

Answer 11

• Oliver William said that managers will make decisions to maximise their own satisfaction.
• This will be dependent on their salary, the number of staff they control, their power over decision making making and the other benefits they receive.

Question 12

What is theory of marginal cost pricing/ allocative efficiency?

Answer 12

• Some firms, particularly nationalised industries, aim to maximise social welfare. This will be done by producing where the value society places on the good is equal to the extra cost of producing that good eg MC=AR.
• This achieves allocative efficiency.