3.2 business objectives

• Who can control a firm?

  Owners, directors, 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
• What is the condition for a firm to short run maximise profit?

  Produce 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 implication of producing more than the profit maximising output?


  The firm would incur losses on the goods produced above the profit maximising point
• At what output level does a firm produce when maximising profit?

  At $P1Q1$
• What does revenue maximisation focus on according to William Baumol?


  Managers are most interested in their level of revenue
• Why is growth in revenue 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 objective of many firms regarding revenue maximisation?


  To provide some profit for the owners while maximising revenue
• Where do firms produce to achieve revenue maximisation?

  Where $MR=$$0$
• How does the output level for revenue maximisation compare to profit maximisation?


  Revenue maximisation produces at $Q2P2$, while profit maximisation produces at $Q1P1$
• What is the main idea behind sales maximisation according to Robin Marris?


  Managers aim to maximise the growth of their company
• Why might managers prefer to focus on growth rather than profit?


  Growth is easier to judge than the level of profit
• What advantage does size provide to a firm?


  Large firms can survive rough periods more easily
• How does growth affect market share?


  Growth increases market share and may push other firms out of business
• What is the relationship between sales maximisation and profit maximisation in the long term?


  Firms are more likely to profit maximise in the long term
• What do Netflix and Spotify aim to achieve?


  They aim to increase the size of their businesses
• What is the production goal for firms aiming to sales maximise?


  To achieve the highest level of sales possible without making a loss
• Where do firms produce to achieve sales maximisation?


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


  They necessitate a fall in price, which may not lead to increased revenue or sales
• What is the principal-agent problem?


  It refers to the differing goals of owners and directors
• What is profit satisficing?


  Making enough profit to keep owners happy while following other objectives
• How does the required profit change for firms over time?


  The amount of profit needed will change year on year based on other firms' performance
• What happens if other firms are making huge profits?


  Shareholders will expect huge profits from the firm as well