P5. Alternative Objectives of Firms
Supplementary Learning Materials - Videos, podcasts, ans schemes etc.
Fixed and Variable Costs |
Short Run vs Long Run |
Variable Factor / Input - This is a factor of production whose quantities can be changed within the time period to change output. Examples of variable factors include labour & raw materials.
Fixed Factor / Input - This is a factor of production whose quantities cannot be changed within the time period to change output. Examples of fixed factors include buildings and heavy-duty machines. |
The short run is a production period during which there is at least one fixed factor. Thus output can only be adjusted by changing the quantities of variable factors.
The long run is a production period which all factors of production are variable. |
_Part 5: Alternative Objectives of firms
http://www.economicshelp.org/microessays/costs/objectives-firms/
Answers to tutorial questions
refer to PD essay N2009 Q9(b)
Have you achieved the following Learning Objectives?
Concepts and Tools of analysis
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Learning ObjectivesAn understanding of the other possible objectives of firms, such as entry deterrence, revenue maximisation, growth maximisation, profit satisficing, and market share dominance is required.
These could be explained as follows: o Entry deterrence: Firms might be aware of potential entrants into the market. To avoid losing market share to these new entrants, incumbent firms could decide to focus their price and non-price decisions on deterring the entry of new firms. An example of how this could be done is to engage in extensive product development so as to differentiate the firm’s goods and services, which could result in higher costs and thus lower profits for the firm. o Revenue maximisation and growth maximisation: For sales managers and commission-based employees whose income is dependent on the growth or total revenue earned by the firm, they might choose to maximise revenue/growth rather than to maximise profits. In order to maximise revenue, sales managers and commission-based employees might make decisions to increase the level of production to the point where marginal revenue is zero (MR = 0) and setting a price that is lower than what is required for profit-maximising. For growth, they will set output at AR = AC, whereby they can still make normal profits. o Profit satisficing: The cost of obtaining sufficient information to make profit- maximising decisions could be significantly high in some cases, such as in firms that have several production locations (possibly internationally) and multiple product offerings. Firms may also be contented with a profit satisficing level of output in order to avoid undue stress or perceived challenges from expansion. In addition, the shareholders of the firm (who are primarily interested in maximising profits) could be far removed from the operations of the firm to be fully aware of the optimal decisions that need to be made in order to maximise profits. The decision-makers, such as regional managers, could decide against making profit-maximising decisions in cases where they do not stand to benefit. Instead, the regional managers could decide to achieve a given level of profits that are deemed to be acceptable by the shareholders even though it falls below the profit-maximising level, and enjoy other benefits such as shorter operating hours and lower levels of stress. o Market share dominance: In an attempt to increase the firm’s market share such that the firm could dominate the market, decisions could be made with the aim of driving rival firms out of the market. For example, the firm could engage in predatory pricing, especially in situations where the firm has sufficient past profits to cope with the losses incurred in the process. Over time, rival firms might not be able to cope with the losses incurred as a result of matching the low prices set by this firm and choose to exit the market. This allows the remaining firms to increase their market share and corresponding level of market power. • Technical analysis of the principal-agent problem is not required. • An understanding that firms ultimately aim to maximise profits in the long run and the significance of the concept of profits to illustrate real-world competitive behaviour is expected. |