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Economics Principles Archives - Page 11 of 20 - MBA Knowledge Base

Conflicts with Firms Profit Maximization Objective

Profit  maximization  is the most popular hypothesis in economic analysis, but there are many other important objectives, which are not to be avoided by any firm. Modem business firms pursue multiple objectives.

An important aspect of profit is its use in measuring and controlling  performances  of the individuals of the large business firms. Researches have concluded that the business  individuals  of middle and top management often deviate from profit objective and try to  maximize  their own utility functions. They give importance to job security, personal ambitions for promotion, larger perks, etc. But this often conflicts with firms profit-making objective.

The reasons for conflicts are as follows:

  • More energy is spent in expanding sales volume and product lines than in raising profitability.
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The Concept of Profit Standards in Managerial Economics

Standards of reasonable profits are determined when a firm chooses to make only reasonable profits rather than to  maximize  its profit. The questions that arise in this regard are as follows:

  • What form of profit standards should be used?
  • How should reasonable profits be determined?

These questions can be understood after going through the following explanatory points.

Forms of Profit Standards

Profit standards is determined in terms of the following:

  • Aggregate money terms
  • Percentage of sales, and
  • Percentage return on investment.

All these standards are determined for each product separately. Among all the forms of profit standards, the total net profit of the firm is more common than other standards.… Read the rest

Alternative Objectives of Business Firms

The traditional theory does not distinguish between owners and managers’ interests. The recent theories of firm, which are also called managerial and behavioral theories of firm, assume owners and managers to be separate entities in large corporations with different goals and motivation. In this section, some important alternative objectives of business firms, especially of large business corporations are also discussed.

1. Baumol’s Hypothesis of Sales Revenue Maximization

According to Baumol, “maximization of sales revenue is an alternative to profit maximization objective“. The reason behind this objective is to clearly distinct ownership and management in large business firms. This distinction helps the managers to set their goals other than profit maximization goal.… Read the rest

Arguments in Favor of Firms Profit Maximization Objective

Profit  maximization  is the most important assumption, which helps the economists to introduce the price and production theories. The traditional economic theory assumes that the profit  maximization  is the only objective of business firms. According to this theory, profits must be earned by business to provide for its own survival, coverage of risks, growth and expansion. It is a necessary motivating force and it is in terms of profits that the efficiency of a business is measured. It forms the basis of conventional price theory. Profit  maximization  is regarded as the most reasonable and analytically the most productive business objective.

The profit  maximization  assumption in this theory helps in predicting the  behavior  of business firms and also the  behavior  of price and out pet under different market conditions.… Read the rest

Applications of the Price Elasticity of Demand

The concept of elasticity of demand plays a crucial role in the pricing  decisions of the business firms and the Government when it regulates prices.  The concept of price elasticity is also important in judging the effect of  devaluation of a currency on its export earnings. If has also a great use in  fiscal policy because the Finance Ministry has to keep in view the elasticity of  demand when it considers to impose taxes on various commodities. We shall  explain below the various uses, applications and importance of the elasticity  of demand.

Elasticity of demand is mainly useful in Pricing Decisions by Business Firms.  … Read the rest

Demand Curve under Different Market Structures

Firm Demand (company demand) denotes the demand for the product/s of a particular firm. While Industry demand means the demand for the product of a particular industry. An industry comprises all the firms or companies producing similar products which are quite close substitutes to each other irrespective of the differences in their brand names. To understand the relation between company and industry demand necessitates an understanding of different market structures.

The demand curve of an individual firm is not the same as the industry or market demand curve except in case of monopoly. Monopoly is that market category in which there is only a single seller and therefore there is no difference between a firm and an industry.… Read the rest