Theme 3.2.1 Flashcards
(32 cards)
What is the sales maximising condition for a firm?
AC=AR
What is the profit maximising condition for a firm?
MC=MR
What is the revenue maximising condition for a firm?
MR=0
Explain why do firms profit maximise?
To fund Reinvestment- Higher profits give firms the internal funds to invest in new tech, R&D, staff training or expansion — improving long-term competitiveness and future growth w/o relying on external borrowing.
Dividends for shareholders- they can return more money to shareholders via higher dividends, keeping investors happy and maintaining a high share price, which protects the company from takeovers and encourages future investment.
Lower C.O.P and prices for consumers- The pursuit of max profits often encourages firms to become more efficient, reducing production costs. This can lead to lower prices for consumers in competitive markets, which boosts sales and reinforces profit growth.
Why don’t firms profit maximise?
No knowledge of MC=MR
To avoid scrutiny for regulators
Key stakeholders might be harmed
Why do firms profit maximise?
To fund reinvestment
Dividends for shareholders
Lower costs and prices for consumers (through E.O.S)
Explain why don’t firms profit maximise?
Lack of Knowledge of MC = MR:
In real-world markets, firms often can’t precisely calculate MC and MR, especially in fast-changing industries. W/o this info, firms may settle for satisficing (making enough profit rather than the maximum).
To Avoid Scrutiny from Regulators:
Firms making very high profits might attract unwanted attention from competition regulators (e.g the CMA or EU Commission). To avoid investigations, fines, or forced breakups, firms may intentionally restrict prices or profits — especially in industries like energy, telecoms, or banking.
Key Stakeholders Might Be Harmed:
Aggressive profit-max (e.g cutting costs too deeply) can damage worker morale, product quality, customer trust, or supplier relationships. Many firms balance profit w/ maintaining long-term stability and good stakeholder relationships (e.g John Lewis Partnership — which focuses on employee satisfaction as well as profit).
What is satisficing
Where firms choose to make enough profit rather than the maximum
What is profit satisficing
Sacrificing profit to satisfy as many key stakeholders as possible groups as possible
How do shareholders feels when firms profit maximise
Happy as they receive an increase in dividends
How do managers feels when firms profit maximise
✔️receive bonuses and higher incomes.
❌may have different objectives e.g may receive bonuses with more customers
How do consumers feels when firms profit maximise
❌ excess prices charged
How do workers/TUs feels when firms profit maximise
❌low wages due to cost cutting
How do the government feel when firms profit maximise
❌excess prices charged for consumers + low wages for workers
How do environmental groups feel when firms profit maximise
❌ cost cutting impacting the environment though increased waste etc
What are the short run impacts of satisficing
Businesses run to the detriment of certain groups to lower costs.
Strikes
Protests
What are the long term impacts of satisficing
Bad reputation- boycotts
Consumers go to competitors
High staff turnover
Damaged relationships with suppliers
Businesses begin to pay properly/on time, treat staff properly etc
Why do firms revenue maximise ?
E.O.S
Predatory pricing
Principle agent problem
Explain why firms revenue maximise for economies of scale benefits
QTY where rev is maximised > the qty where profit is maximised =
By maximizing revenue, a firm can increase its sales volume, which enables it to produce more units. This increased output leads to E.O.S, reducing per-unit costs and increasing profitability. In this way, revenue maximization helps the firm achieve greater efficiency and cost savings, ultimately boosting its long-term profits.
Define economies of scale and explain it in relation to average cost per unit
The cost advantages enjoyed by a firm as they increase their production .
As firms produce more, their AC/unit DECREASES due to the spread of fixed costs over a larger quantity of output and INCREASED operational efficiency.
Define and explain predatory pricing
involves setting prices extremely low (often below cost) to drive competitors out of the market. The aim is to capture a larger market share and eliminate competition
Explain why firms revenue maximise for predatory pricing
Price where rev max< Price where profit max=
It’s used to increase their market share rapidly. Even though the firm may incur losses in the short term, once competitors are driven out, the firm can increase prices and enjoy a monopoly or dominant market position, leading to higher revenues and profits in the future. The goal is to sacrifice short-term profits for long-term revenue and market control
Define and explain the principle agent problem
arises when there is a conflict of interest between the owner (the principal) and the manager (the agent). Managers may prioritize their own interests (e.g., job security, personal bonuses) rather than the owners’ goal of profit maximization.
Explain why firms revenue maximise due to the principle agent problem
managers may choose to focus on revenue maximization rather than profit maximization because their compensation or performance is linked to sales targets rather than profitability.
By maximizing revenue, managers can meet their performance targets, secure bonuses, and enhance job security, even if it doesn’t result in the most efficient or profitable outcome for the firm.
This can lead to a focus on boosting revenue, even at the expense of profit, especially in firms where managers have incentives tied to revenue performance.
