3.2.1

• Owners and shareholders want increased profits and dividends
• directors look after the interests of shareholders
• managers run day to day running of business
• consumers want consumer sovereignty (their wants and needs determine what is produced)
• workers can exert pressure on company through trade unions - for higher wages or better working conditions
• the government affect firms through regulation and taxation
• pressure groups attempt to influence business activity to act a certain way
• profit maximisation is the greatest different between total revenue and total cost
• profit maximisation occurs when MC = MR
• Profit maximisation

  
• neo classical economists assume that firms maximise short run profits - this implies that firms adjust output and price in response to changes in market condition - frequent price changes are disliked by consumers - damages firms position in market
• Neo Keynesian’s believe firms maximise long run profits instead - assuming they use cost plus pricing techniques
• profit maximising means that profits can be used to reinvest back into the firm - encourages growth
• profit maximisation leads to increased shareholder dividends - increases their income which acts as an incentive for investment - will likely to invest more
• entrepreneurs can reward themselves for taking the risk by taking out a cut of firms profits
• Profit maximising may increase employee satisfaction if their pay increases
• firms will look to cut costs in order to maximise their profit, and this may result in increased efficiency
• Firms may increase their prices to increase their revenues in order to increase profits, leading to a loss in consumer surplus
• profit maximising firms may avoid environmental and social issues (pollution, worker exploitation) - leads to pressure groups taking action against firm
• firms may cut workers wages to increase profits, leading to a fall in the standard of living of workers and worker motivation
• high profits may lead to new firms entering the market, which can lead to more competition for the firm, reducing shareholder dividends in the long run
• profit satisficing is making sufficient profits to satisfy the demands of owners
• firms aim to satisfy as many stakeholders as possible by sacrificing some profit (profit satisficing)
• firms may also profit satisfice to pass on lower prices onto consumers
• Increased costs for the firm could be into putting higher salaries for workers to satisfy trade unions
• Increased costs for the firm could be to reduce carbon footprint of a firm to satisfy environmental pressure groups or the government
• profit satisficing can occur anywhere between MC = MR and breakeven
• revenue maximisation occurs when total revenue is highest
• revenue maximisation is when MR = 0
• Economist William Baumol discovered that salaries and rewards for managers were closely linked to revenue rather than profit
• higher revenue = higher pay
• the quantity at which revenue maximisation occurs is greater than profit maximisation - allows for greater economies of scale
• due to the divorce between ownership and growth, owners will want to profit max but managers will want to revenue max (revenue max leads to higher pay)
• due to the divorce between ownership and growth, managers can use revenue max to gain higher salaries
• revenue max price is lower than profit max price, so firms can try predatory pricing
• predatory pricing is illegal
• Revenue max may lead to less profits, so shareholders may see their dividends fall - dissatisfaction
• resources can be diverted to less productive uses to increase revenue
• Sales maximisation occurs when the volume of sales is greatest
• sales maximisation is when AR = AC (when firm is breaking even)