lecfigtp_14

Alternative Theories of the Firm

Alternative Theories of the Firm

Problems with Traditional TheoryProblems with Traditional Theory

Difficulties in maximising profit non-use of opportunity cost difficulties in identifying demand & MR difficulties in deciding the time period for

maximising profit

Alternative aims separation of ownership and control the principal–agent problem managerial utility maximisation profit satisficing

Difficulties in maximising profit non-use of opportunity cost difficulties in identifying demand & MR difficulties in deciding the time period for

maximising profit

Alternative aims separation of ownership and control the principal–agent problem managerial utility maximisation profit satisficing

Q For what reason may businesses not necessarily seek to maximise profit?

Q For what reason may businesses not necessarily seek to maximise profit?

A. B. C. D. E.

20% 20% 20%20%20%A. Many shareholders do not

want to maximise profits.

B. Owners of the firm are not ‘rational’.

C. Managers have too little information.

D. Managers may have different aims from shareholders.

E. Shareholders are only agents in setting the aims, not principals.

A. Many shareholders do not want to maximise profits.

B. Owners of the firm are not ‘rational’.

C. Managers have too little information.

D. Managers may have different aims from shareholders.

E. Shareholders are only agents in setting the aims, not principals.

Alternative Maximising TheoriesAlternative Maximising Theories

Long-run profit maximisation implications for investment and short-run

pricing and output difficulties in testing the theory

Managerial utility maximisation factors determining managers’ utility

• salary• security• dominance• professional excellence

implications for firms’ behaviour importance of economic environment

Long-run profit maximisation implications for investment and short-run

pricing and output difficulties in testing the theory

Managerial utility maximisation factors determining managers’ utility

• salary• security• dominance• professional excellence

implications for firms’ behaviour importance of economic environment


Sales revenue maximisation (short run) equilibrium output and price

Sales revenue maximisation (short run) equilibrium output and price

Sales revenue maximising outputSales revenue maximising output£

QO

TR

£

QO

TR

Q1

Sales revenue maximising outputSales revenue maximising output

£

QO

TC

TR

Q1


£

QO

TC

TR

Q2 Q1


Q At the sales-revenue maximising output, which of the following is true?

Q At the sales-revenue maximising output, which of the following is true?

A. B. C. D. E. F.

17% 17% 17%17%17%17%A. MC = MR.

B. MC < MR

C. MR = 1.

D. MR = 0.

E. MC = 1.

F. MC = 0.

A. MC = MR.

B. MC < MR

C. MR = 1.

D. MR = 0.

E. MC = 1.

F. MC = 0.


Sales revenue maximisation (short run)

equilibrium output and price

• effect of a minimum profit constraint




£

QO

TC

TR

Q2 Q1Q3

Total profit

Sales revenue maximising with a profit constraintSales revenue maximising with a profit constraint





• implications for advertising





Q If a sales-revenue maximising firm is currently earning more than the target profit and

is free to advertise, then it will spend

Q If a sales-revenue maximising firm is currently earning more than the target profit and

is free to advertise, then it will spend

A. B. C. D. E.

20% 20% 20%20%20%

A. more on advertising so as to increase profit.

B. more an advertising until profit falls to the target level.

C. more on advertising until the MR of the advertising equals the MC.

D. less on advertising as it is already above its target level of profit.

E. less on advertising and concentrate on cutting costs.

A. more on advertising so as to increase profit.

B. more an advertising until profit falls to the target level.

C. more on advertising until the MR of the advertising equals the MC.

D. less on advertising as it is already above its target level of profit.

E. less on advertising and concentrate on cutting costs.






• comparisons with short-run profit maximising












implications for the consumer














assessment of the theory







assessment of the theory


Growth maximisation

measuring ‘growth’

equilibrium for growth maximising firm?

Alternative theories and the consumer

Growth maximisation

measuring ‘growth’

equilibrium for growth maximising firm?

Alternative theories and the consumer

Q It is difficult to predict the long-run price and output of a long-run growth-maximising firm

because

Q It is difficult to predict the long-run price and output of a long-run growth-maximising firm

because

A. B. C. D. E.

20% 20% 20%20%20%A. the firm will need to make strategic decisions, the outcome of which is bound to be uncertain.

B. revenue curves are likely to shift over the long term.

C. the behaviour of rivals is hard to predict over the long term.

D. market opportunities are likely to change.

E. All the above

A. the firm will need to make strategic decisions, the outcome of which is bound to be uncertain.

B. revenue curves are likely to shift over the long term.

C. the behaviour of rivals is hard to predict over the long term.

D. market opportunities are likely to change.

E. All the above

Multiple AimsMultiple Aims

Satisficing and the setting of targets various possible targets

potential conflicts between targets

Behavioural theories of the firms the nature of behavioural theories:

descriptive

target setting

target conflict and search procedures

organisational slack

Satisficing and the setting of targets various possible targets

potential conflicts between targets

Behavioural theories of the firms the nature of behavioural theories:

descriptive

target setting

target conflict and search procedures

organisational slack

Q Relying on organisational slack as a business strategy is a problem because it is likely to

Q Relying on organisational slack as a business strategy is a problem because it is likely to

A. B. C. D. E.

20% 20% 20%20%20%A. increase costs.

B. create conflicts of goals between departments.

C. increase uncertainty.

D. increase the danger of hold-ups and shortages.

E. All the above

A. increase costs.

B. create conflicts of goals between departments.

C. increase uncertainty.

D. increase the danger of hold-ups and shortages.

E. All the above

Multiple AimsMultiple Aims

Predictions of behaviour

conservatism

comparison with other firms

Satisficing and the consumer’s interest

advantages

disadvantages

Predictions of behaviour

conservatism

comparison with other firms

Satisficing and the consumer’s interest

advantages

disadvantages

lecfigtp_14

Documents

maximising profitnon

salesrevenue maximising

target profit

growth maximising firm

profit maximisingimplications

profit falls

revenue curves

target level of profit