Theories

of the Firm
 FIRM
•  A Firm is an en'ty that draws various types of
factors of produc'on in different amounts from
the economy , and converts them into desirable
output through a process with help of suitable
technology.
Factors of production
•  5 Factors of produc'on :
1.  Land
2.  Labour
3.  Capital
4.  Enterprise
5.  Organisa'on
Theories on objectives of Firms :

1.  Profit Maximiza'on Theory
2.  Sales Revenue Maximiza'on
3.  Behavioral Theories
Behavioral Theories – Cyert &
March
•  Many businesses are profit seeking but not always
profit maximizing.
•  The main aim of business could be long run profit
maximisa'on which involves sacrificing short run
profits.
•  Increasing market share at expense of a rival by
cuQng prices.
•  Behavioral economist feels that large businesses are
complex organisa'ons made up of many different
stakeholders. Every stakeholder has its own
objec've. For e.g – Customer interest is different
from government agencies or from the manager or
from the shareholder.
SatisAicing Behavior
•  It is an alterna've business objec've to maximising profits. It
means business is making enough profit to keep shareholder
happy or it is sufficient enough to keep the confidence of
investor.
•  Sa'sficers examine a limited set of alterna'ves and choose
the best of them.
•  Sa'sficing behavior happens when businesses aim for
minimum acceptable levels of achievement in terms of
revenue & profit.
Sales (output) maximization
•  Selling as much as you can without making a loss.
•  At sales maximiza'on there are no supernormal or just
normal profits.

REST IS FOR
TOMORROW