3.2

• satisficing diagram

  
• problems with satisficing


  - Principle agent problem.

  - Managers are likely to follow the objective of profit satisficing where they make enough profit to keep owners happy whilst following other objectives and not profit maximise, as they want to satisfy their own objectives.
• Satisficing


  Choosing an option that is acceptable, although not necessarily the best or perfect.
• problems with sales and revenue max


  Necessary for a fall in price which other firms may copy and therefore revenue will decrease.
• sales max diagram

  
• why do firm sales max


  - Growing market shares

  - Build brand.

  - Increase economies of scale

  - Increase investor interest.

  - attract finance
• where do firm produce when sales maximising

  AC=AR
• sales maximisation advantages


  - growth inreases market shares

  - increases market power
• sales maximisation

  - Managers aim to maximise the growth of the company as its what their salary depends on.
• revenue max diagram

  
• where do firms produce when they revenue max

  mr=0
• advantages of revenue max

  increases prestige and used as a justification to shareholders for managerial rewards.
• revenue maximisation


  - Managers are most interest in their level of revenue since this is what their salary depend on.
• profit max diagram

  
• profit max compared to revenue maximisation

  - higher prices

  - lower output
• what happens when u produce more than mc=mr

  making a loss on goods
• what happens when u produce less than mc=mr

  increase their profit as MR is higher than MC as they are making more in revenue than it costs to produce the good.
• where do firms produce when they profit max

  mc=mr
• why large firms don't profit max

  - May profit satisfice.

  - Divorce of ownership from control leading to other objectives.
• small firms disadvantages

  - lack of finance
• what prevents profit max

  - MR and MC is not known with certainty.

  May experience bounded rationality
• advantages of profit max

  - Rational economic agents are maximisers.

  - Profit is the reward for risk taking and entrepreneurship.

  - Provide finance for expansion,

  - Reward shareholders.
• profit maximisation

  the interests of owners or shareholders are the most important and therefore aim to profit maximise in the short run to maximise returns.
• what is the shut-down point

  when AVC=AR
• in the long run what to firms have to produce to survive

  normal profit
• when should a firm leave an industry

  AVC>AR
• when should a firm continue production

  AVC<AR
• steps of shut down prices.

  - In the sort run a business will continue to supply products as long as their revenues at least cover variable costs. Revenue= AR x Q.

  - Variable costs are casts that vary directly with output e.g. raw materials.

  - Providing that the price per unit (AR) > AVC then a contribution is being made to cover some fixed cost.

  - As a result the firm would be better off continuing production if we assume that fixed costs are lost if a shut-down decision is made

  - But if there is a fall in demand and price drops below AVC, then a firm might decide to shut-down production to minimise the losses.

  - This is because not enough revenue is being generated and total losses suffered would be higher if production continued.
• shut down prices diagram

  
• when do firms leave the industry

  - earning below normal profit

  - cant cover its variable costs

  - when price falls below avverage variable costs
• where does this occur

  price= average variable cost