9708 · 7.8
Differing objectives and policies of firms flashcards
Revision flashcards for Cambridge 9708 Differing objectives and policies of firms (syllabus 7.8). Flip, recall, then mark a real past-paper question.
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Profit maximisation output?
Where MC = MR — the firm produces until the last unit adds as much to revenue as to cost.
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Revenue maximisation output?
Where MR = 0 — the firm sells as much as possible before extra sales reduce total revenue. Output is higher than profit-max.
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Sales maximisation (Baumol)?
Maximise revenue subject to a minimum profit constraint — managers prefer growth in sales volume over maximum profit.
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What is satisficing?
Managers accept satisfactory (adequate) profit rather than maximising — due to separation of ownership and control, imperfect information, and multiple stakeholder pressures.
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What is limit pricing?
An incumbent sets price below the profit-max level (but above AC) to deter new entrants — sacrifices short-run profit for long-run market share.
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CSR as a firm objective?
Corporate social responsibility — firms pursue environmental and social goals alongside profit. May raise costs short run but improve reputation and demand long run.
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What is the profit maximisation rule for a firm?
A firm maximises profit by producing at the level of output where Marginal Cost (MC) equals Marginal Revenue (MR).
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Define 'satisficing' in the context of firm objectives.
A behavioural objective where a firm aims to achieve a satisfactory level of performance across various metrics (e.g., profit, market share) to please different stakeholder groups, rather than maximising a single variable.
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What is the 'principal-agent problem' in a public limited company?
The conflict of interest that arises when the owners (principals, i.e., shareholders) have different objectives from the managers (agents) who control the firm's day-to-day operations.
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At what point on a diagram does a firm maximise sales revenue?
At the quantity of output where Marginal Revenue (MR) is equal to zero. This corresponds to the point of unit price elasticity of demand on the AR curve.
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How can pursuing Corporate Social Responsibility (CSR) benefit a firm in the long run?
It can enhance brand reputation, increase customer loyalty, attract and retain high-quality employees, and potentially avoid stricter government regulation, leading to sustainable long-term profitability.
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Why might managers of a large firm prefer sales maximisation over profit maximisation?
Managers' salaries, status, and job security are often linked to the size of the firm (e.g., revenue or market share). Maximising sales grows the firm, which can benefit managers personally, even if it doesn't maximise profit for shareholders (the principal-agent problem).