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Unit - 6

Unit - 6. Objectives of Firms. There are various theories and models developed by economist:. The P rofit M aximization Model Economist Theory of Firm Cyert & March’s Behaviour Theory Marris Growth Maximization Model Boumal’s Satatic & Dynamic Model

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Unit - 6

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  1. Unit - 6 Objectives of Firms

  2. 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

  3. 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.

  4. 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.

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

  6. 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.

  7. 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

  8. 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

  9. Boumal’s Static & Dynamic Model:

  10. 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

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