3.2.1- Business Objectives

Question 1

What are business objectives?

Answer 1

The specific, measurable goals a company looks to achieve. These influence how they allocate resources and make decisions.

Question 2

What are examples of business objectives? (4)

Answer 2

• Profit maximisation
• Revenue maximisation
• Sales maximisation
• Satisficing

Question 3

Who influences business objectives? (5)

Answer 3

• Owners/Shareholders
• Directors/Managers
• Workers
• State
• Consumers (Consumer Sovereignty)

Question 4

What is on the business objective graph?

Answer 4

Marginal Revenue
Average Revenue
Marginal Costs
Average Costs

Question 5

Who suggested the Profit Maximisation theory?

Answer 5

Neoclassical economists

Question 6

Explain the Profit Maximisation objective.

Answer 6

Neoclassical Economics assumes that the interest of owners and shareholders are the most important. Therefore it assumes the goal of firms is to profit maximise in order to maximise owner’s returns.

Question 7

What do firms get by maximising profits in the short run? (2)

Answer 7

• Generate revenue funds for investment
• Generate funds to survive a possible slowdown during a recession

Question 8

What are the defining characteristics of profit maximisation in the short run? (4)

Answer 8

• Acts immediately and in the current period
• Focuses on maximising current profits
• Decisions- cutting costs, delaying investment, increasing prices
• However, ignores customer loyalty and employee satisfaction

Question 9

What are the characteristics of profit maximisation in the long run? (4)

Answer 9

• Acts over several years
• Focuses on improving efficiency and building brand
• Decisions- invest in technology, customer services, training
• However, may accept lower profits to grow market share

Question 10

Who suggested the concept of Revenue Maximisation?

Answer 10

William Baumol

Question 11

Explain the Revenue Maximisation objective.

Answer 11

Baumol suggested managers would be most concerned with increasing the level of revenue as this is what their salary would depend on. Even if salary is not directly connected to value, an increase would lead to prestige and an excuse for managerial rewards.

Question 13

Why would a fall in revenue be negative?

Answer 13

It would lead to a downward spiral for the company. Also a fall in staff and financial institutions being less willing to lend the firm money.

Question 14

Who came up with the Sales Maximisation theory?

Answer 14

Robin Marris

Question 15

Explain the Sales Maximisation objective?

Answer 15

Managers aim to maximise the growth of their company above any other objective. Their salary is linked to the size of the company. Size is linked to prestige, security and market power.

Question 16

Is Sales Maximisation short-term or long-term?

Answer 16

Short-term

Question 17

Is Profit Maximisation short-term or long-term?

Answer 17

Long-term

Question 18

Where does the firm produce when Profit Maximising?

Answer 18

MC=MR

Question 19

How is price determined when Profit Maximising?

Answer 19

MC=MR up to AR

Question 20

Where does the firm produce when Revenue Maximising?

Answer 20

MR=0

Question 21

How is price determined when Revenue Maximising?

Answer 21

MR=0 up to AR

Question 22

Where does the firm produce when Sales Maximising?

Answer 22

AC=AR

Question 23

How is price determined when Sales Maximising?

Answer 23

AC=AR across

Question 24

How does price and output differ between Sales and Profit Maximisation?

Answer 24

In Sales, prices are lower and output is higher.

Question 25

What are the problems with Sales and Revenue Maximisation? (2)

Answer 25

- It necessitates a fall in price. Other firms may copy this so there may be no or little increase in revenue or sales. - It also brings lower profits.

Question 26

How do prices differ between Profit and Revenue Maximisation?

Answer 26

In Revenue, prices would be lower.

Question 27

What would happen if Profit Maximisation firms produce more than MC=MR?

Answer 27

They would be making a loss on the goods produced.

Question 28

What is Satisficing?

Answer 28

Due to the Principal-Agent problem, managers are likely to follow the objective of profit satisficing. This involves making enough profit to keep owners happy while following their own objectives (salaries).

Question 29

Why could owners be unhappy with profit in the next year?

Answer 29

The amount of profit needed would change year on year and depends on the comparison to other firms in the market. (e.g. if everyone else is making huge profits, shareholders will also expect this from their firm.)

Question 30

What is Managerial Utility Maximisation?

Answer 30

Oliver Williamson said that managers will make decisions to maximise their own satisfaction, dependent on their salary, the number of staff they control, their decision power and other benefits.

Question 31

What is Marginal Cost Pricing/Allocative Efficiency?

Answer 31

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