| What is the Traditional Theory of the Firm based upon? | -Firms are aiming to Maximise Profits |
| How can a Firm achieve Maximising Revenue? | -Revenue is Maxed out when MR=0. No Revenue can be achieved from selling 1 Additional Unit
-Firms will thus keep Increasing Output further Past the Point where PROFITS are Maximised, as long as more Output = More Sales |
| How can a Firm achieve Maximising Sales? | -Sales is Maxed out when AR=AC
-This is virtually the Highest Output Level a Firm can keep for the Long Run. It is higher than Profit and Revenue Maximising
-If Sales increased more, then the Firms would be making a Loss |
| Why may a Firm which sets out Profit Maxing for the Long Run may use Sales or Revenue Maxing in the Short Run? | -Firms maxing out their Revenue / Sales can increase their Market Share, or get Monopoly Power so they can make Supernormal Profits in the Long Run. Higher Sales may also make it easier to Borrow Money
-Firms may even operate at a Loss in the Short Run to make a Profit in the Long Run. Firms can expect Revenue to pick up in the Future if they achieve substantial Brand Recognition or awareness. Or if Costs are reduced once new Production methods are brought about, or if costs can be lowered at higher levels of outputs (Economies of Scale)
-Firms may be looking to Survive in the Short Run by getting Normal Profits. Once formally established, it can aim for maximum profits. |
| What are Not for Profit Organisations? | -These are Firms that do not Pay Profit to their Owners.
-They aim to provide a Benefit for the Public. Charities are a Prime Example of such |
| What is Corporate Social Responsibility? How does the Firm act? | -This is where Firms are aiming to Benefit Society, as well as making a Supernormal Profit. This is their only difference to an NPO
-Firms may aim to Protect the Environment via Sustainable Resources, Support local Firms by using their Suppliers, or pay their Workers above the Market Rate
-Consumers, seeing the Ethical Firm, may buy from them despite the Higher Price |
| How can a Divorce of Ownership from Control occur? | -When Firms are Young and Small, the Owner usually Manges the Firm on a Day-Day Basis
-When the Firm grows, Finance is often raised from selling Shares. The new Shareholders become Part Owners of the Firm.
-But Directors, who are Appointed by the Shareholders, are Running the Firm, in the interests of the Shareholders
-Thus, the Owners are no longer in Control of the Day-to-day running of the Firm. |
| What is the Principle-Agent Problem? | -The Divorce of Ownership from Control is the Root of this Problem
-A principal (Shareholder) pays for an Agent (Director) to act in the principal's Interests, but instead, the Agent acts Selfish
-If the Principles interest was for Maximum Profit for Maximum Dividends, but the Agents interest was for Maximum Bonus, which comes from Maximum Revenue, then you can see the Tension
-Directors may be also willing to Expand the Firm for their selfish Interests - Power grows, and Salary expands.
-Employees can also be the Agents in this scenario. The Agent here wants to increase his Pay or have Job Security, rather than being profit-maxed (Which could mean a Lower Wage for the Agent...) |
| How can Owners use Accountability and Incentives to retain Control of the Firm | -How Accountable the Agent is to the principal can lead to how easy it can be for the principal to deal with the Problem
-Shareholders can Remove Directors with a Vote, but they usually lack Information to do such
-Accountability ensures the Agent must be clear with their own Intentions and Aims.
-Owners may also offer Incentives to ensure that the Agent acts accordingly. For example, a Bonus if a certain Profit is Achieved. |
| What does Satisficing mean, in Business Objectives terms? | -Refers to doing just enough to Satisfy and keep Important Stakeholders. It may not be the Maximum, but it's good enough
-This may be the case when there are Conflicting objectives between Stakeholders and Influencers
-For Example, Directors may see their Shareholders want Maximum profit, whilst simultaneously knowing Employees want Maximum Wages. Both can't be Executed, so a Satisfaction Amount must be Sorted |
