27-02-2013, 02:04 PM
Objectives of the Firm
Objectives of the Firm.ppt (Size: 173 KB / Downloads: 32)
Firm
A firm is an organisation that combines and organizes resources for the purpose of producing goods and services for sale.
Firms are of business and non-business types.
Function of a Firm
To purchase resources or inputs or factors of production namely, labour, land, capital, managerial talent and raw materials in order to transform them into goods and services for sale.
Optimising Objective
Profit Maximization Theory: According to traditional economic theory profit maximization is the sole objective of business firms.
Profit Maximizing Conditions: A firm will maximize its profit at that level of output at which the difference between total revenue and total cost is maximum.
Assumptions of the Theory
The objective of the firm is to maximize its profits where profits are the difference between revenue and costs.
The entrepreneur is the sole owner of the firm.
Tastes and habits of consumers are given and constant.
Techniques of production is given.
Firm has complete knowledge about the amount of output which can be sold at each price.
Entry of firms in the short run is not possible. New firms can enter in the long run only.
Profits are maximized both in the short run and the long run.
The firm’s own demand and costs are known with certainty.
Profit Maximization under Perfect Competition Firm
Under conditions of perfect competition, the MR curve of a firm coincides with its AR curve. The MR curve is horizontal to the X axis because the price is set by the market and the firm sells its output at that price. the firms is thus in equilibrium when MC = MR = AR (Price). The equilibrium of the profit maximization firm under perfect competition is where MC curve cuts the MR curve first at point A. It satisfies the condition of MC = MR, but it is not a point of maximum profits because after point A, the MC curve is below the MR curve.
Criticisms of the Profit Maximization Theory
Profits uncertain: The principle of profit maximization assumes that firms are certain about the level of their maximum profits, but profits are most uncertain.
No perfect knowledge: The theory is based on assumption that all firms have perfect knowledge. But in reality, firms do not possess sufficient and accurate knowledge about the conditions under which they operate.
Firms do not bother about MC and MR: In real world firms do not bother about the calculation of MR and MC. Most of the firms are not even aware of the two terms.
Doubtful validity: The assumption of profit maximization is of doubtful validity. There is no reason to believe that all businessmen pursue the same goal. They may aim at sales maximization, expansion of market share, etc.