Objectives of the Firm A Comparative Estimate

Objectives of the Firm: A Comparative ‘Estimate

From a comparison of various theories and real world examples, it appears that earning of profit -is an objective pursued by all firms, whether directly or indirectly, as it is necessary for long run survival of the firm.

  • Traditional theory of firm considers maximisation of profit levels as the sole objective of the firm,
  • Managerial theories aim at maximisation of managers, and owners, utility functions subject to a minimum profit constraint, and
  • Behavioural theories regard satisfactory level of profits as one of the many goals of the firm.

It can be observed that, though the models of managerialism differ in the factors included in the managerial utility functions, the deciding variables, and their predictions, they have the same basic assumption of maximisation of utility subject to minimum profit constraint. Baumol specifies that maximisation of sales is subject to minimum level of profit. Similarly, the objective of size maximisation put forward by Marris ensures a fair return on owners’ capital that generates a minimum profit level for the firm Williamsons model also considers a satisfactory profit level necessary for job security so as to maximise managerial utility function. Behavioural theories also state ‘satisfactory’ level of profits as an objective of the firm. The firm may attempt to obtain satisfactory profits because different aspiration levels and numerous goals of the firm rule out profit maximisation. Thus, the alternative theories of firm can be regarded as consistent with the objective of profit maximisation.

Since there are numerous goals that a firm can pursue in the short run, relating to sales maximisation size maximisation, stockholder value, stable market share, revenue growth, technology and customer satisfaction, it is necessary to precisely state a firm’s goal. Different goals can lead to different ‘managerial decisions given the limited amount of resources. For example, if the primary goal of the firm is maximisation of market share rather than profit, the firm might decide to reduce prices. If the main goal is to provide technologically advanced products, the firm might decide to allocate more resources to research and development. This would reduce profits of the firm in the short run but may result in increased profits overtime. Similarly, if the goal of the firm is to carry a complete line of product and services, it may choose to sell certain products in the short run, even though they may not be earning profits,

In real world, many firms have different short-term and long-term goals. For example, many Japanese firms pursued the short run goal of maximisation of market share (with an expectation of lower profits) to enter US market in 1970s while anticipating that in the long run, profits will increase. Case 2.2 shows that, though the short term goal of Cadbury India is maintenance of stable market shares, it is equally concerned on the margin front. Similarly profit after tax of HLL jumped in 1998-1999 due to short-term goal of growth pursued by the firm in 1990s. Both Harley­Davidson and Thomson are concerned about volume growth to reposition themselves with an eye on the profits.

Managerial Economics Theory, Economics Help, Macroeconomics Theory

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