Objectives of Firms

Question 1

What can firms do with their profit?

Answer 1

• pay dividends to shareholders
• save for the future
• invest towards future growth e.g. R+D

Question 2

What is the main objective for firms?

Answer 2

profit maximisation (although this ISN’T for ALL firms)

Question 3

When will firms profit maximise?

Answer 3

Marginal revenue = Marginal cost (MR = MC)

Question 4

What happens when MC > MR? Why?

Answer 4

There is a negative impact on revenue because of diminishing returns.

Question 5

To gain LR profit some firms may…

Answer 5

gain revenue+ market share in SR, even if profit must be sacrificed.

Question 6

Why has Amazon gained little profit in the last 10yrs?

Answer 6

They aimed to maximise market share in SR.

Question 7

What can bounded rationality limit in firms?

Answer 7

Ability to make choices that lead to profit maximisation.
As a result, profit maximisation is not always possible.

Question 8

If some firms don’t profit maximise what might they do instead?

Answer 8

Satisfice

Question 9

Who was the Theory of Satisficing preposed by?

Answer 9

Herbert Simon

Question 10

Theory of Satisficing

Answer 10

owners setting minimum acceptable levels of achievement.
E.G. min goal for sales, revenue and profit

Question 11

Corporate social responsibility

Answer 11

Firms trying to make SNP in a sustainable way. This can be beneficial for society.
E.G. a firm might aim to produce its goods whilst keeping carbon emissions low.

Question 12

Maximising market share

Answer 12

AKA sales maximisation.
Produce where average revenue is equal to average cost (AR = AC).

Question 13

Why might an oligopoly aim for sales maximisation?

Answer 13

Would allow them to achieve economies of scale and greater price-setting power in the long-run.

Question 14

Revenue maximisation.

Answer 14

Produce where marginal revenue is equal to zero (MR = 0).

Question 15

Why may a firm revenue maximise not profit maximise?

Answer 15

• Increases the size of the firm, this could be beneficial to managers due to the prestige.
• perks they may receive from managing a large firm.

Question 16

Divorce of ownership from control

Answer 16

Shareholders own the company, managers run the company.

Question 17

Principle- agent problem

Answer 17

Asymmetric information problem.
Interests of the manager may not be in the interest of the shareholder.

Question 18

Why does the principle-agent problem occur?

Answer 18

It comes about because shareholders often can’t observe easily and accurately the key day-to-day decisions of management.

Question 19

How can shareholders regain control over managers of a company?

Answer 19

• Holding them accountable for the firms performance, adding pressure for them to perform their interests.
• Managers could have their pay linked to the share price over a number of years.

This realigns the goals of managers and shareholders.

Question 20

negatives of profit maximisation

Answer 20

• higher prices for final consumers- reduces income/purchasing power- lower consumer surplus.
• high profits may incentivise others to join market- more competitive- may reduce returns to shareholders.
• overly focused on profits- lose sight of social + enviro aspect of businesses.

Question 21

Why do firms sales maximise?

Answer 21

• economies of scale- lower AC
• limit pricing- limiting competition (illegal)
• principle-agent problem- divorce between ownership + control- sales growth as leverage to shareholders.
• to flood the market- consumers become loyal.

Question 22

Why do firms revenue maximise?

Answer 22

• economies of scale- lower AC
• predatory pricing- sacrifice its profit to drive out competition (illegal)
• principle agent problem- divorce between ownership + control- revenue as leverage to shareholders.