3.2 business objectives

• Who can control a firm?

  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 the level of production for 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 level determined by profit maximisation?

  The output is determined by where $MC=$$MR$
• What does revenue maximisation focus on according to William Baumol?

  Managers are most interested in their level of revenue
• Why is growth in revenue considered positive 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 aim for revenue maximisation as long as they provide some profit for the owners
• What was Amazon's revenue in 2015?

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

  Where $MR=$$0$
• How does the price level change when firms are revenue maximising compared to profit maximising?

  Prices would be lower when revenue maximising
• What is Robin Marris's view on managers' objectives?

  Managers aim to maximise the growth of their company
• Why is size linked to security for firms?

  Large firms can survive rough periods more easily
• What is the relationship between growth and market share?

  Growth will increase market share and may push other firms out of business
• What is the typical strategy for firms in the long term?

  Firms are more likely to profit maximise in the long term
• How do firms aim to achieve sales maximisation?

  By getting the highest level of sales possible without making a loss
• What is the output level for sales maximisation?

  Firms produce 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?

  Owners and directors have different goals
• 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
• What influences the profit expectations of shareholders?

  The level of profit made by other firms