Objectives of firms

• What is the primary objective of most firms?

  Profit maximization
• What does profit represent for entrepreneurs?

  It is the reward for taking risks
• When does a firm break even?

  When total revenue equals total cost
• How is profit maximization achieved?

  When marginal cost equals marginal revenue
• What happens to profits when marginal revenue is greater than marginal cost?

  Profits increase
• Why do firms choose to profit maximize?

  To provide greater wages and dividends
• What is a benefit of retained profits for firms?

  They are a cheap source of finance
• Why are short-run interests of owners important?

  They aim to maximize their gain
• Why might firms profit maximize in the long run?

  To provide stable prices and output
• Why are PLCs particularly keen to profit maximize?

  To keep shareholders satisfied with dividends
• What is the principal-agent problem?

  When agents act in their own interests
• What happens when an owner sells shares in a firm?

  They lose some control over the firm
• What is shareholder activism?

  Pressure on management for higher dividends
• What might firms aim for during economic decline?

  Survival in the market
• What is one reason firms might seek growth?

  To take advantage of economies of scale
• How can firms increase their market share?

  By maximizing sales even at a loss
• What is revenue maximization?

  Occurs when marginal revenue equals zero
• What is sales maximization?

  When a firm sells as much as possible without loss
• What is the satisficing principle?

  When firms earn just enough profits for shareholders
• Why might managers not aim for high profits?

  Because their personal rewards are small
• What occurs due to the divorce of ownership and control?

  Conflicting objectives among stakeholders