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Objectives of a Firm

Objectives of a Firm

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Published by yasheshgaglani

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Published by: yasheshgaglani on Oct 06, 2011
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Objectives of a firm
In the traditional theory of the firm, profit maximization has been assumed to be the sole (only)objective of the firm; whether the market is perfectly competitive or otherwise the firm will conductits business activities by applying the marginal rule i.e. the size of the firm is to be determined byequalizing marginal cost with marginal revenue.In 1939, in England, R C Hall and C J Hitch on the basis of their empirical studies refuted (objected)this objective of any firm. With the managerial revolution that has taken place in the world theownership of the firm is divorced from management. It is the manager who now enjoys considerabledecision making power. So according to W J Baumol, sales revenue maximization is the goal of amodern corporate enterprise. According to R Marris, the objective of the firm is the maximization of the balanced rate of growth for the firm.According to Williamson, managers today pursue policies which maximize their own utility rather thanprofit that is to be distributed among the share holders. According to some others, the objective of amodern firm is satisfactory profit and not maximum profit.There are multiple objectives of a firm like:a.
Maximizing profitsb.
Sales/revenue maximizationc.
Increasing market sharesd.
Building a business of reputatione.
Financial stability and liquidityf.
Maintaining good labour relationsg.
Leisure and long term survival etc.
Profit maximization objective:
In the neo classical theory of the firm, a single owner entrepreneur is assumed. Such firms existedbefore the rise of the corporate enterprise. This firm had a thorough knowledge about the pastperformance, present conditions and future changes in the environment of the firm. It also knew itsown demand and cost functions. Such a firm conducted its own business with a view to maximize itsprofits.However the modern business firm is highly complex organization in which management is separatedfrom ownership. So the mangers set before themselves objectives other than profit maximization also.The managers do not always have all the necessary information. Mostly the information that reachesthem is incomplete or distorted. Due to their inability to evaluate all the possible strategies open tothem maximization of profit objectives is not pursued earnestly. According to Hill and Hitch firms havea multitude of goals and maximization of profit is one of them.Though profit is given high priority, firms rarely wish to maximize profits due to:
Fear of rivals
Fear of government
To maintain good relations with public.
Maximization of long run profits: according to some economists, short run profit maximization does notnecessarily result in profit maximization in the long run. A firm attempting to equate MC and MR ineach period may not succeed in maximizing the profit in the long period. Thought they may notmaximize their profits in each period, every firm may try to maximize profits at least in the long run.This objective is attained by equating the price to average cost.
Sales revenue maximization:
W J Baumol is of the view that a modern business firm aims at salesrevenue maximization rather than profit maximization.1.
Top managers are interested in maximizing their own earning which they have learnt throughtheir experience is possible by maximizing sales rather than profits.2.
When a firm enhances the prestige of the managers while large profits are shared by the shareholders3.
Banks and other financial institutions are far more impressed by the turn over of the firms andare willing to provide finance to firms whose sales record is impressive in terms of the size of the sales.4.
In a competitive world, firms with large and growing sales have an edge over (better than)firms with low sales turn over. Such firms with huge sales can tackle their personal problemssatisfactorily.5.
Managers now-a-days are not interested in showing results in terms of spectacular profitsbecause if in the future they fail to maintain the high level of profit they will find themselvesin trouble.TR/TC R R1 TCTRANTO Q M M1 outputTPTM1 is minimum profit less than profit ON. At OM, TR is maximum at RM. OM is the maximum salesoutput which is higher than the profit maximizing output OQ>Therefore
sales maximization output is larger than profit maximization output. The firm’s behavior is
rational as it aims at minimum profit with maximum sales

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