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Alternative Theories of the Firm (Competitive Market (There are many…
Alternative Theories of the Firm
Are firms profit maximisers
Maybe not due to demand or cost uncertainty
Maybe profit not only goal
Maybe profit maximizing seen as too risky
Not always - depends on the objectives of the firm!
Competitive Market
There are many buyers and seller
No one has perfect competition
Everyone is a price taker
firms can freely enter or exit
Firms assumed to be profit maximsers
3 objectives of firm
Sales Maximisation
Not always = to more profit
Personal Welfare
Salary increases, dividends, other perks
Social Welfare
Altruism, community based initiatives
Baumols Theory of the Firm
firm is a coalition of owners, managers and employees with conflicting goals that need to be addressed in order for the firm to survive.
Managers more interested in Sales than Profits
Salary Increases and bonuses
Prestige and Reputation
High sales indicate overall performance
Regular dividends
Stability
Strengthen position in the market
Oligopolic Market
Static Model
Single time period - future ignored
maximise total sales revenue
Subject to minimum profit constraint
Set by shareholders
traditional cost and revenue functions: U shaped Cost and D= downward sloping
DIAGRAM
theory predicts that the sales maximiser (PR2) produces a higher output than the profit maximiser.
sales maximiser earns lower profits than profit maximisers