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Title: Traditional and Alternative views of the firm
Description: These notes are from the subject Economics for Business and Management (2nd year undergraduate). They include details about the traditional view of the firm, principal-agent theory and the alternative views of the firm + diagrams.
Description: These notes are from the subject Economics for Business and Management (2nd year undergraduate). They include details about the traditional view of the firm, principal-agent theory and the alternative views of the firm + diagrams.
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Traditional view of the firm is seeing it as a ‘black box’ where the input (labor, technology) is used in
the most efficient way
...
Last is
the output
...
Regardless of the type of production and how it is processed, every firm`s objective is to maximize
profit (where MC=MR at point of the output)
...
Critics say it is unrealistic because firms cannot tell when MC will equal MR
...
But they can use the concept of TC and TR and maximize profit if they find the
output where TC=TR
...
There is a time-period problem as well with that theory
...
So
the firms cannot know the exact right time to seek profit maximization
...
They take into consideration the principal-agent theory (where the
principal is the owner and the agent is the manager of a firm) and state that a firm has different
objectives from profit max
...
This may lead to the owner-manager dichotomy/divorce where there might be a
problem between ownership and control and ‘the span of control’ widens so the owners may not be
able to exercise enough control over the managers
...
Firstly, when a satisfactory level of profit is achieved, managers are free to pursue their own interests
with the aim of increasing their utility
...
He outlines a number of factors that influence managers’ utility- salary,
status, job-security, power etc
...
U1, U2 and U3 are the satisfactory levels
...
U3 cannot be reached so U2 is the best option for the managers
...
The second theory is the Sales Revenue Maximization created by Baumol
...
And it is sales that
should be increased because they are a good indicator of organizational performance and that is why
lenders rely on sales data
...
In the diagram above is shown how profits are maximized at Q1 and Price P1, there MC=MR
...
If MR=0,
nothing more can be added to the Total Revenue by producing extra so Total Revenue must be at
maximum
...
Another theory is the Growth Maximization theory developed by Marris
...
It is
also because managers strive for growth rather than profit maximization
...
This growth is best measured by the growth in the sales revenue because this is the
easiest way to measure the size of a business
...
However, as it depends on ups and downs of the stock market, it is considered unreliable
...
The last theory is the Behavioural theory in which the profit and size of the firm do not matter
...
Title: Traditional and Alternative views of the firm
Description: These notes are from the subject Economics for Business and Management (2nd year undergraduate). They include details about the traditional view of the firm, principal-agent theory and the alternative views of the firm + diagrams.
Description: These notes are from the subject Economics for Business and Management (2nd year undergraduate). They include details about the traditional view of the firm, principal-agent theory and the alternative views of the firm + diagrams.