OBJECTIVES OF THE BUSINESS FIRM
INTRODUCTION
Economic theory underscores the fact that each firm in the industry operatesunder competitive conditions and hence tries to operate more efficiently towithstand the competition. The indicator of efficiency is profits. The assumptionhere is that each firm has one man as the owner and entrepreneur, and that hissloe aim is to maximise profits.As time passed, one-man firms were replaced by partnerships and giantcorporations and the structure of the firm changed to include theowner/entrepreneur/shareholders on the one hand and the managers on theother. The responsibility of the owners/entrepreneurs/shareholders gotbifurcated. The day to day affairs of the firm were looked after by the managersand owners/entrepreneurs/shareholders took organisational decisions aimed atmaximising profits.The goals of the owners/entrepreneurs/shareholders are called
Organisational Goals
while the goals of the mangers are referred to as
Managerial Goals
alsoknown as
Operational Goals.
PROFIT MAXIMIZATION AS BUSINESS OBJECTIVE
Conventional theory of business firm assumes profit maximization, as the soleobjective of a business firm. The real indicator of success of any businessenterprise is the quantum of its profits.In common man’s language, profit means the excess of income over costs. Ineconomics and managerial economics profits refer to rewards for entrepreneurialskills . some economists believe that profit is a reward for entrepreneurial skills,while others regard it as a remuneration for the entrepreneur and not a reward for his entrepreneurial skills. In this sense, profit is regarded as income accruing toequity holders, in the same sense as wages accrue to labour ; rent accrues toowners of rentable assets ; and interest accrues to money lenders.Profit is always linked with risk and uncertainty. Therefore profits differs. First, itis the residue of the income after other factors of production--- namely, landlabour and capital --- have been paid for . Therefore profit does not mean fixedremuneration--- like rent wages and interest. Profits fluctuate, and, therefore,
they are either positive or negative. Profits fluctuate because of the fact thatbusiness involves speculation, risk, and operations under uncertain conditions,that is under conditions of uncertainty.
How do profits emerge:1.
Profits emerge primarily because of risk taking. The operation of everybusiness involves a risk.; every businessman therefore has to take risks . Therisk is of two types--- coverable risks and uncoverable risks. Coverable risks arerisks against fire, theft etc. Because they are covered by insurance. The other type of risk is purely a business risk.
Example
The dress making industry is highly volatile because fashions change quite often.Now, if a businessman brings a new fashion into the market, it may click or it maynot click.This type of risk cannot be covered by insurance. It involves uncertainty. In thissense, it is said that profits are the result of risks which a businessman takesand the uncertainty which is involved in business operations.2. Profits also emerge as a result of innovation. Innovation means that one bringssome new product into the market following laboratory and market research.
Example
Before Nescafe was introduced, coffee drinkers depended upon filters., and ittook some time to prepare the decoction Once Nescafe was introduced, coffeedrinkers ceased to depend upon filters, because coffee powder dissolvedinstantaneously in water.This is what is called innovation . If the company marketing Nescafe is makingenormous profits today, it is because of this innovation.3. Profits may also from some advantageous conditions. In the present imperfectcompetition, Monopolistic conditions have set in. There is heavy productdifferentiation. One particular brand may capture the market and drive outcompetitors and substitutes as well. Such a situation arises out of someadvantageous or accidental conditions. Again, a firm may enjoy a monopoly; if does, it rakes in huge profits.4. Profits arise out of a sudden windfall. The demand for a particular product, for example may shoot up sky-high; the businessman makes enormous profits
Profit Measurement:
Profits are measured over a period of time --- generally ayear. That is from 1
st
April to 31
st
March. Profits are measured by accountant inaccordance with accounting methods. But the economists approach is differentfrom the accountant. While calculating profits, the accountant deducts theexpenses from the revenue of the company. But when expenses are consideredhe takes into account only the explicit costs; that is, actual costs. The economiston the other hand, does not stop at explicit coasts, he takes into account imputedcosts as well. By imputed costs we mean, the costs that would have beenincurred on any item if it had not been owned by the company.
Example:
A firm may be housed in its own building. Now the economist calculates the rentof the building at the prevailing market rate and treats that as cost. This is knownas imputed cost.It is evident, then, that the accountant and the economist differ in their approachto the measurement of profits. The formula may be written as follows:Accountant’s FormulaProfit = Revenue Expenses (explicit costs)
˗
Economist’s FormulaProfit = Revenue Explicit Costs Imputed Costs.
˗ ˗
Economic profits are considered to be more realistic from the managerial point of view because they project a true financial picture of a company.
ALTERNATIVE OBJECTIVES OF BUSINESS FIRMS
There is no reason to believe that all businessmen pursue the same objective”Recent research on this issue reveal that the objectives that the business pursueare more than one. Some important objectives other than profit maximization are: (a) maximization of sales revenue, (b) maximization of the firm’s growth rate, (c)maximization of manager’s utility function, (d) making satisfactory of profit,(e)long-run survival of the firm and (f) entry prevention and risk avoidance
1.Sales revenue Maximization
Baumol has postulated maximization of sales revenue as the alternative to profitmaximization objective. The reason between this objective is the dichotomy
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