Business objectives

• What is the traditional objective of firms in economic theory?

  Profit maximization
• Why do firms aim for profit maximization?

  To reinvest in capital and technology
• How do large profits benefit pharmaceutical and electronics companies?

  They can reinvest in R&D
• What is a dividend?

  A share of the profit for shareholders
• How can lower costs benefit consumers?

  By allowing lower prices for products
• What is the profit equation?

  Total revenue minus total cost
• What does profit maximization occur at?

  Where marginal cost equals marginal revenue
• Why can't profit maximization occur to the right of the MC=MR point?

  Cost is always higher than revenue
• Why can't profit maximization occur to the left of the MC=MR point?

  Each extra unit generates less profit
• Why might businesses choose not to profit maximize?

  They may not know their MC and MR
• What is one reason businesses avoid profit maximization?

  To avoid scrutiny from regulators
• What could happen if a business harms key stakeholders?

  They could suffer from a bad reputation
• What is profit satisficing?

  Sacrificing profit to satisfy stakeholders
• Who are considered key stakeholders?

  Anyone with an interest in the business
• What is the relationship between profit maximization and stakeholder harm?

  Profit maximization can harm key stakeholders
• What is revenue maximization?

  Occurs when marginal revenue equals zero
• What is the principal-agent problem?

  Separation between ownership and control
• What is sales maximization also known as?

  Growth maximization
• What occurs at the break-even point?

  Average cost equals average revenue
• What is a limit price?

  Price at break-even to limit competition
• Why might a business flood the market?

  To develop consumer loyalty
• What is survival as a business objective?

  To remain in the market during competition
• What is the objective of public sector organizations?

  To maximize society's welfare
• What is corporate social responsibility?

  Recognizing social responsibility in business
• What are the four fundamental objectives of firms?

  • Profit maximization
  • Profit satisficing
  • Sales maximization
  • Revenue maximization
• How do profit maximization, profit satisficing, sales maximization, and revenue maximization relate to each other?

  • Profit maximization occurs at MC=MR
  • Profit satisficing occurs between profit and sales max
  • Sales maximization occurs at break-even
  • Revenue maximization occurs at MR=0
• What are the potential consequences of harming key stakeholders?

  • Bad reputation
  • Strikes from workers
  • Investigations by the government
  • Protests from environmental groups