Problems with Traditional Theory

Difficulties in maximising profit

non-use

of opportunity cost in identifying demand & MR

Alternative Theories of the Firm

difficulties difficulties

in deciding the time period for maximising profit of ownership and control utility maximisation

Alternative aims
separation the

principalagent problem satisficing

managerial profit

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

Alternative Maximising Theories

Sales revenue maximising output

Sales revenue maximisation (short run)

equilibrium

output and price

TR

Sales revenue maximising output

Sales revenue maximising output

TC

TR

TR

Q1

Q1

Sales revenue maximising output

TC

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

A. MC = MR.

TR

B. MC < MR C. MR = 1. D. MR = 0. E. MC = 1. F. MC = 0.

Q2

Q1

Alternative Maximising Theories

Sales revenue maximising with a profit constraint

TC

Sales revenue maximisation (short run)

equilibrium

output and price

TR

effect of a minimum profit constraint

O Q

Q2

Q3 Q1 Total profit

Alternative Maximising Theories

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. 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.

Sales revenue maximisation (short run)

equilibrium

output and price

effect of a minimum profit constraint implications for advertising

Alternative Maximising Theories

Alternative Maximising Theories

Sales revenue maximisation (short run)

equilibrium

Sales revenue maximisation (short run)

equilibrium

output and price

output and price

effect of a minimum profit constraint implications for advertising comparisons with short-run profit maximising

effect of a minimum profit constraint implications for advertising comparisons with short-run profit maximising

implications

for the consumer

Alternative Maximising Theories

Alternative Maximising Theories

Sales revenue maximisation (short run)

equilibrium

Growth maximisation
measuring

output and price

growth for growth maximising firm?

effect of a minimum profit constraint implications for advertising comparisons with short-run profit maximising

equilibrium

Alternative theories and the consumer

implications assessment

for the consumer of the theory

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

various

Multiple Aims
Satisficing and the setting of targets
possible targets conflicts between targets
potential

Behavioural theories of the firms

the

nature of behavioural theories: descriptive setting conflict and search procedures slack

target target

organisational

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

Multiple Aims
Predictions of behaviour
conservatism

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

comparison

with other firms

Satisficing and the consumers interest

advantages disadvantages