3.2

• Who can control a firm according to the study material?

  Owners or shareholders, directors and managers, workers, the state, consumers, and pressure groups
• What is the primary goal of firms according to neo-classical economics?


  To profit maximise in the short run
• Why do firms aim to profit maximise in the short run?


  To maximise owners' returns and generate funds for investment
• How do firms determine their production level for short-run profit maximisation?


  By producing where $MC=$$MR$
• What happens if a firm produces less than the profit-maximising output?


  Producing more will increase profit since $MR$ would be higher than $MC$
• What is the consequence of producing more than the profit-maximising output?

  The firm would incur losses on the goods produced above the profit-maximising point
• What is the output determined by in the profit maximisation diagram?


  Where $MC=$$MR$
• What does William Baumol suggest about managers' interests?


  Managers are most interested in their level of revenue
• Why is revenue growth important for managers?


  It increases their prestige and justifies managerial rewards
• What could a fall in revenue indicate for a company?


  It could signal the start of a downward spiral for the company
• What is the aim of many firms regarding revenue maximisation?

  To revenue maximise as long as they provide some profit for the owners
• What was Amazon's revenue in 2015?


  Nearly £120bn
• Where do firms produce to revenue maximise?

  Where $MR=$$0$
• How does the price change when firms revenue maximise compared to profit maximisation?


  Prices would be lower when revenue maximising
• What is the principal-agent problem?


  It is the conflict of interest between owners and directors
• What do managers aim to achieve due to the principal-agent problem?

  Managers aim to profit satisficing
• What does profit satisficing entail for managers?


  Making enough profit to keep owners happy while pursuing other objectives
• How does the level of profit needed for satisficing change?


  It changes year on year and depends on the profit levels of other firms
• What is Robin Marris's view on managers' objectives?

  Managers aim to maximise the growth of their company above any other objective
• Why is growth important for managers?


  It increases prestige and is easier to judge than profit levels
• What is often associated with larger firms?

  Security, as they can survive rough periods more easily
• What does growth increase for a firm?

  Market share and power over prices
• What is the typical strategy of firms in the long term?


  Firms are more likely to profit maximise
• Which companies follow the objective of sales maximisation?

  Netflix and Spotify
• What do firms aim for when sales maximising?

  The highest level of sales possible without making a loss
• What is the production point for sales maximisation?


  Where $AC=$$AR$
• What is a potential issue with sales and revenue maximisation?

  It necessitates a fall in price, which may not lead to increased revenue or sales
• What is a common outcome of both sales maximisation and revenue maximisation?


  They tend to bring lower profits