THEME 3, Business Objectives (3.2)

Question 1

What are the main 5 business objectives?

Answer 1

• Profit maximisation
• Sales revenue maximisation
• Business Growth
• Satisficing objectives
• Environmental and social obligations

Question 2

What is profit maximisation?

Answer 2

• When a firm operates at the price and output which derives the biggest profit
• When MC = MR
• No additional unit produced gives an extra loss or revenue

Question 3

Why may firms choose to profit maximise?

Answer 3

• Greater wages and dividends for entrepreneurs
• Retained profits are a cheap source of finance
• In SR, interests of principals is the most important
• In LR, consumers don’t like price fluctuations in SR, so this will provide a stable P and Q.

Question 4

What is revenue maximisation?

Answer 4

• When MR=0
• Each extra unit sold generates no extra revenue

Question 5

Why may a firm choose to revenue maximise?

Answer 5

• Gain market share
• Build brand recognition
• Achieve economies of scale
• Attract investors
• Pursue managerial incentives such as higher salaries

Question 6

What is sales maximisation?

Answer 6

• When a firm aims to sell as much of their good as possible without making a loss

Question 7

Example of a firm which may work at sales maximisation

Answer 7

Not for Profits

Question 8

Why may firms choose to sales maximise?

Answer 8

• Achieve a larger market share
• Attract more consumers
• Gain economies of scale
• Deter competitors

Question 9

What is satisficing?

Answer 9

• Earns enough profits to keep shareholders happy

Question 10

Why do shareholders want profits?

Answer 10

As they earn dividends from them

Question 11

Synoptic point:

Answer 11

The state of the economy can affect a firm’s objectives. For example, a firm may be less
likely to adopt a profit maximising objective if the economy is in a recession.

Question 12

Why may a firm choose to satisfice?

Answer 12

• Conserve limited resources
• Manage multiple maybe conflicting objectives

Question 13

Why is satsifcing also a practical approach?

Answer 13

• Principal-Agent problem
• Aligns with behavioural economies, where individuals and organisations accept satisfactory outcomes rather than perfection

Question 14

Who are the main stakeholder groups?

Answer 14

Shareholders, managers, workers, customers, government, local community, trade unions

Question 15

What factor determines shareholders’ relative strength?

Answer 15

The amount of capital invested and their ability to influence through voting rights and dividends.

Question 16

What factor determines managers’ relative strength?

Answer 16

• Information advantage
• Alignment with shareholder interests
• Control over daily decisions

Question 17

What factor determines workers’ relative strength?

Answer 17

• Unionisation
• Skill level
• Labour market conditions
  (unemployment rate, elasticity of labour supply)

Question 18

What factor determines consumers’ relative strength?

Answer 18

Price elasticity of demand (PED), availability of substitutes, and quality of information.

Question 19

What factor determines government’s relative strength?

Answer 19

• Can either empower or weaken stakeholders
• Consumer protection laws
• Minimum wage laws
• Competition policy and regulators

Question 20

How does macroeconomic context affect stakeholder strength?

Answer 20

• In recession, firms gain power over choosing workers (high unemployment)
• In booms, workers gain power (labour shortages)

Question 21

How does market structure affect stakeholder strength?

Answer 21

• Monopoly/oligopoly → firms stronger
• Competitive market → consumers stronger.

Question 22

Why might shareholder power be weaker than expected?

Answer 22

Shareholders are often dispersed and lack coordination; principals (with more info) may pursue their own objectives.

Question 23

Why might worker power be weaker than expected?

Answer 23

Low union membership, high unemployment, or easily replaceable low-skilled labour reduces bargaining strength.

Question 24

Why might consumer power be weaker than expected?

Answer 24

Information asymmetry, brand loyalty, or lack of substitutes means firms can exploit market power.

Question 25

Why might government power be weaker than expected?

Answer 25

* Lobbying by large firms * Political constraints

Question 26

What is survival as a business objective?

Answer 26

* Prioritising SR existence * Common for start-up firms

Question 27

What is growth as a business objective?

Answer 27

Expanding size/output to exploit economies of scale or gain market power.

Question 28

What is CSR?

Answer 28

* Corporate Social Responsibility * When firms consider environmental, social, and ethical objectives alongside profit.

Question 29

What is utility maximisation?

Answer 29

Consumers aim to maximise satisfaction from spending given income constraints.

Question 30

Why might consumers fail to maximise utility?

Answer 30

Imperfect information, bounded rationality, influence of behavioural biases.

Question 31

How does market structure affect objectives?

Answer 31

In competitive markets, survival dominates; in monopolies, profit/revenue maximisation is more likely.

Question 32

How does time period affect objectives?

Answer 32

* Short run → survival/satisficing * Long run → profit maximisation/growth.

Question 33

How do business cycles affect objectives?

Answer 33

* Recession → survival focus * Boom → profit, growth, CSR.

Question 34

How can ownership type affect objectives?

Answer 34

Private firms focus on profit; public sector firms may prioritise welfare/service provision.

Question 35

How do behavioural theories of the firm affect objectives?

Answer 35

Firms don’t always act to maximise profit — satisficing, sales maximisation, and bounded rationality explain real-world behaviour.