Unit - 6 Objectives of Firms

There are various theories and models developed by economist: The Profit Maximization Model Economist Theory of Firm Cyert & March’s Behaviour Theory Marris Growth Maximization Model Boumal’s Satatic & Dynamic Model Willianson’s Managerial Discretionary Theory

Profit Maximization Model: Assumptions: A firm is a producing unit & as such it converts various inputs into outputs. The basic objective of each firm is to earn maximum profit. A firm operate under a given market condition. A firm will select that alternative course of action which helps to maximize profit. A firm makes an attempt to change its prices, input & output quantity to maximize its profit.

Firm has to take care of following factors: Pricing and business strategies of rival firm. Aggressive sales promotion policies adopted by rival firms. Maintaining the quality of product and services to customers. Taking risks and uncertainty. Adopting a stable business policy. Avoiding clash between short term and long term profits.

Determination of profit – maximizing price & output: Total Revenue & Total Cost Approach Marginal Revenue & Marginal Cost Approach

Economist Theory of Firm: According to this theory, a traditional firm is a group with a particular organizational and management structure having command over property rights. A firm is formed, run and managed by entrepreneur who has following attributes: He has legal permission to run an enterprise. He can enter into contract with any group of people who supply productive resources. He can take his own decisions to maximize his economic gain. He is entitled to enjoy the income after making payments to all productive resources in the form of wages, salaries, bills, interest rate etc. he can transfer his right to other individual. He has all right to make changes in his organization.

Cyert & March’s Behaviour Theory: According to this theory, goals of a business organization would depend upon the multiple objectives of each group and their collective demands. Various kinds of conflicts and problem would certainly affect the decision- making process of the organization. Out of several objectives firm has five important goal: Production goal Inventory goal Sales goal Market-share goal Profit goal

Marris Growth Maximization theory: According to this theory, Firm aims at maximizing its growth rate as a goal. A growth rate is a better yardstick to measure the success of a firm. Maximum growth rate is equal to two imp variables- The rate of demand for products Growth rate of capital

Boumal’s Static & Dynamic Model:

Williamson’s Managerial Discretionary theory: According to this theory, profit maximization and manager’s utility maximization go together. Manager’s utility function is expressed as: U = f (S, M, Id) S= additional expenditure of staff M= Managerial Emoluments Id= Discretionary Investment