Objectives of Firms

Question 1

Profit-satisficing

Answer 1

In many firms, there is a separation of ownership and control. Those who own the company (shareholders) often do not get involved in the day to day running of the company.
This is a problem because although the owners may want to maximise profits, the managers have much less incentive to maximise profits because they do not get the same rewards, (share dividends)
Therefore managers may create a minimum level of profit to keep the shareholders happy, but then maximise other objectives, such as enjoying work, getting on with other workers. (e.g. not sacking them) This is the problem of separation between owners and managers.
This ‘principal-agent‘ problem can be overcome, to some extent, by giving managers share options and performance related pay although in some industries it is difficult to measure performance.

Question 2

Sales Maximisation (AC=AR)

Answer 2

Firms often seek to increase their market share – even if it means less profit. This could occur for various reasons:

Increased market share increases monopoly power and may enable the firm to put up prices and make more profit in the long run.
Managers prefer to work for bigger companies as it leads to greater prestige and higher salaries.
Increasing market share may force rivals out of business. E.g. the growth of supermarkets have lead to the demise of many local shops. Some firms may actually engage in predatory pricing which involves making a loss to force a rival out of business.

Question 3

divorce of ownership nd control

Answer 3

Happens when the owners of a business do not control the day-to-day decisions made in the business. For example, the majority of shareholders in public companies are not involved in any way with operational decision-making by the companies in which they have invested.

Question 5

profit maximins objective can benefit consumers via lower prices

Answer 5

a profit motivated business will always keep costs low and revenues high implying no waste in production and snsuring the needs and wants of consumers is met

Question 6

benefits of profit-maximising

Answer 6

-ensuring costs low for consumers
-meets shareholders (owners of business) happy which is improtant as they are considering they are funding enterprise
-majour source of investment for firms improve profitiability

Question 7

evaluation of profit maximising

Answer 7

making large snp signal investigation by regulatory authorities (PFizer (vaccine makers signalled by regulatord for tiered pricing to poor countries) increase COP

Question 8

profit satisficsing

Answer 8

sacrificing proifts to satisfy as many stakeholders as possible. Profit maximisation will benefit key stakeholders such as managers but could harm other like workers who suffer from low wages, consumers suffer high prices to prevent costly future disputes

Question 9

revenue maximisation description

Answer 9

occurs when marginal revenue equals zero with a lower price and higher quantity than profit maximisation

Question 10

reasons for revenue maximisation

Answer 10

producing at a higher quantity than profit max allows firm to experience greater economies of scale , reducing average costs to then reduce price and gain market share ahead of rival
predatory pricing to drive out existing profit firms from industry allowing firm more market share to develop a monopoly presence

help higher salaries ,large officies and other perks in the job

Question 11

reasons for sales maximisation

Answer 11

flood market with products
allow busienss to gain brand loyalty developing strong customer base
it can provide monopoly power allowing for long run profit max

produces at highest possible quantity without loss makes firm experience eos reducing ac

survival-to establish a presence