Objectives of firms – profit max, rev max, sales max, satisficing Flashcards
Profit maximisation:
when MC = MR
TRADITIONAL ECONOMIC THEORY
assume firm is looking to maximise profits
why profit maximise?
- Reinvestment = profits can be reinvested into new/ upgraded capital + r&d
- Dividends for shareholders – pay greater dividends to them
- Lower costs + lower prices for consumers – can pass on lower prices to consumers by maintaining lower costs
- Reward for entrepreneurship – reward for taking risk of starting business
evaluate profit maximise 1
- Knowledge of MC and MR – some business do not know this, they don’t take it into decision making
- Greater scrutiny – competition authorities/ regulation will critique them more and possibly investigate and force reduces in prices or force environmentally/ healthy targets
evaluate profit maximise 2
- Key stakeholders harmed – satisficing is not occurring
- Other objectives more appropriate
Why is profit maximised at MC = MR?:
- Any point right of the point have MC higher than MR
- Any point on the left, each extra unit will generate more profit
- So rational place to stop would be at MC = MR
Profit Satisficing example
sacrificing profit to satisfy as many key stakeholders as possible
profit satisficers overcome
third major issue of profit maximisation
profit satisficers + stakeholders
Shareholders – happy with profit max
Managers – happy with profit max
Consumers – unhappy due to damage to environment + higher prices
Workers/ TVs – unhappy - if wages are low due to cost cutting
Gov – unhappy - environment + low wages
Environmental groups – unhappy environmental damage
profit satisficers might be more appropriate objective as
profit maximization bringing all this heat above
Revenue Maximisation
MR = 0
why revenue max?
- Economies of scale – higher quantity = lower costs = lower prices
- Predatory pricing – rival firms undercut prices to push rivals out, sacrificing profit to do so.
- Prinicipal agent problem – divorce between ownership and control, those who don’t control, managers may decide to revenue max to look for benefits personally
- fall in revenue is dangerous for reinvestment and payments for shareholders
Sales maximisation
where AC = AR = breakeven point
why sales maximise
- Maximise growth and output
- Economies of scale – maximised output = LRAC fall
- Limit pricing – reduce incentives of firms coming in as it is the normal profit range, so it would limit competition – illegal though?
- Principal agent problem – managers may use growth/ sales to get greater perks in their jobs
- Flood the market – more sales = more people see it and develop loyalty and more recognition, then can change objective after.
By short-run profit maximising, firms can
also generate funds for investment and to help them survive a slowdown during a recession.
