Business Objectives

Question 1

What is a firm?

Answer 1

An economic agent/organisation that brings together factors of production in order to produce output

Question 2

What are two of the most important decisions firms make?

Answer 2

• production (how much they will make)
• selling price

Question 3

What is short run

Answer 3

The time period when a firm is free to vary its input of at least one variable factor of production, usually labour, but faces fixed inputs of other factors of production usually capital

Question 4

What is the law of diminishing returns

Answer 4

• if firm increases number of inputs of the variable factor (being labour) while holding constant the input of the other factor (capital)
• it will gradually drive less addition per output per unit of labour for each further increase

Question 5

What are total costs?

Answer 5

Fix costs + total variable costs
- sum of all costs incurred to produce a level of output

Question 6

What is the average cost?

Answer 6

Total cost divided by level of output

Question 7

What is the marginal cost?

Answer 7

The cost incurred from producing one more unit of output

Question 8

What are fixed cost?

Answer 8

Costs that do not change directly without output

Question 9

What are variable costs?

Answer 9

Cost that change directly with output

Question 10

What are sunk costs

Answer 10

Costs a firm can’t avoid paying even if it produces no output at all
- cannot be recovered

Question 11

What is the long run?

Answer 11

Possible for affirm to alter all factors of production therefore all costs must be variable

Question 12

Economies of scale

Answer 12

Having lower long run average cost that result from an increase in the scale of production

Question 13

What are the diseconomies of scale?

Answer 13

Disadvantages that occur if the scale of production becomes too large
- Increasing long run average costs

Question 14

What are internal economies of scale?

Answer 14

Economies of scale that arise from the expansion of a firm

Question 15

Different type types of economies of scale

Answer 15

• division of labour: specialisation and lower unit costs
• Financial: negotiate lower rates of interest
• Purchasing: bulk buying
• Management: employee managers to monitor the workforce
• Technical: specialist machinery
• Marketing: bulk buy advertising

Question 16

What is economy of scope?

Answer 16

• average cost of production decreases as a result of increasing the number of different goods produced

Question 17

What are external economies of scale?

Answer 17

• Expansion of an industry in which the firm is operating

Question 18

Different types of external economies of scale

Answer 18

• Technology:
• Concentration: lower transport costs as firms are closer together

Question 19

Different types of diseconomies of scale

Answer 19

• Communication: becomes difficult as the increase output?
• Coordination: organising production becomes difficult
• Motivation: hard to to increase all employees as the increase output

Question 20

What is the minimum efficiency scale?

Answer 20

Smallest level of output, a firm can produce at the minimum level of a long run average cost

Question 21

What is the importance of minimum efficiency scale?

Answer 21

• A firms MES is the lowest scale necessary to achieve economies of scale in its industry

Question 22

What is total revenue ?

Answer 22

Revenue received from sales
P x Q

Question 23

What is marginal revenue?

Answer 23

Additional revenue received if it sells an additional unit of you don’t need to explain output

Question 24

What are the main influences on revenue?

Answer 24

Price and demand

Question 25

What is accounting profit?

Answer 25

Profit made by business based on costs incurred but excluding opportunity cost

Question 26

What is normal profit

Answer 26

Level of profit needed to keep a firm in the market in the long run

Question 27

What is abnormal profit?

Answer 27

Profit over and above the normal profit

Question 28

What are the different objectives for firms?

Answer 28

Profit maximisation Sales revenue maximisation Sales volume maximisation Utility and growth maximisation - Social welfare, profit satisficing and csr

Question 29

At what level do firms maximise profit?

Answer 29

MC = MR

Question 30

What is the principal agent problem?

Answer 30

- conflict between objectives of managers(principles) and owners(agents)

Question 31

How can the principal agent problem be overcome?

Answer 31

- make every employee a principal - manager - build in profit bonuses and contracts

Question 32

Where is sales revenue maximise?

Answer 32

Where MR=0

Question 33

What is the sales revenue maximisation?

Answer 33

Making as much revenue from sales as possible,

Question 34

What is sales volume maximisation?

Answer 34

Businesses pursue an objective of selling as many units as possible - Usually new or small firms

Question 35

What is growth maximisation?

Answer 35

- businesses pursuing objective of growth so that they can become as large as possible - Possibly to gain economies of scale - can influence the market

Question 36

What is utility maximisation?

Answer 36

Refers to the satisfaction of managers in the business - managers made decision gaining maximum satisfaction for themselves, e.g. Pay rise for themselves

Question 37

What is profit that satisficing?

Answer 37

- Business sets a reasonable level of profit that will satisfy owners

Question 38

What is social welfare?

Answer 38

- Firms that don’t seek to max profits - Are set out to improve social welfare in the economy

Question 39

What is corporate social responsibility?

Answer 39

A responsibility to do what is right for society and the environment - Will also be responsible to major stakeholders in their business

Question 40

What can influence a firms objectives?

Answer 40

- The owners The managers The market The relationship between owners and managers