3.2 Business Objectives

Cards (4)

  • Objectives of a Firm : Profit Maximisation
    • Profits benefit shareholders - increases share price and receive dividends
    • Occurs when MC=MR
    • Can be hard to find level of PM
    • In Short-Run, firms will seek to adjust marginal costs - regular price changes in SR would be disruptive to consumers
    • In Long-Run, firms will seek to adjust prices
    • CMA may force changes in price
    • PM level results in higher prices for consumers
  • Objectives of a Firm: Revenue Maximisation
    • Occurs when MR=0
    • Normally due to Principal-Agent Problem: sales managers gain commission - incentivises them to maximise sales
    • Firms maximise revenue in order to benefit from EoS
    • In SR, firms may use this strategy to eliminate competitors - lower prices = more market share
  • Objectives of a Firm: Sales Maximisation
    • Occurs when AC=AR
    • In SR, firms use this strategy to clear stock - sell it without making a loss per unit
  • What is Satisficing?
    When a firm makes the satisfactory about of profit rather than Profit Maximisation to ensure shareholders maintain confidence in firm.
    • Occurs due to Principal-Agent Problem; Agents settle for level of output between profit and sales maximisation - increases wages and reduces conflict with shareholders