Business Objectives

• A firm's motives are often determined by who controls it
• Consumers can exert control over firms through consumer sovereignty.
• What does neo-classical economics assume is the primary goal of firms?

  Profit maximisation
• Short-run profit maximising can generate funds for investment
• What is the condition for profit maximisation in the short run?

  MC=MR
• Steps to determine profit maximisation in the short run

  1️⃣ Produce where MC=MR

  2️⃣ Determine price using AR curve
• Managers may aim to maximize growth rather than profit to increase their salary.
• Why do large firms often consider growth to be linked to security?

  They survive recessions better
• Growth-focused strategies are often short-term, while firms eventually shift to profit maximisation
• Firms aiming for sales maximisation produce where AC=AR.
• What is a key problem with both sales and revenue maximisation strategies?

  Lower profits
• Match the concept with its description:

  Principal-agent problem ↔️ Conflicting goals between owners and managers

  Profit satisficing ↔️ Making enough profit to satisfy owners

  Managerial rewards ↔️ Benefits or incentives for directors
• What is the objective of profit satisficing?

  Keep owners happy
• William Baumol suggested that managers are most interested in their level of revenue
• Firms aiming for revenue maximisation must still provide some profit for owners.
• What is the condition for revenue maximisation?

  MR=0
• Revenue maximisation results in higher output and lower prices
• Steps to compare profit and revenue maximisation

  1️⃣ Determine output where MR=0 for revenue maximisation

  2️⃣ Determine output where MC=MR for profit maximisation

  3️⃣ Compare prices and quantities
• What is the profit-maximizing quantity shown in the graph?

  Q2

  
• What does the line labeled 'AC' represent in the graph?

  Average Cost

  
• The point where the 'AR' line intersects the 'AC' line indicates the break-even point.

  
• Which curve represents marginal cost in the image?

  MC

  
• The marginal revenue curve is labeled as MR