• Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

Explain why managerial theories of the firm have developed, and how the predictions from these models differ from those of the profit maximising approach?

Extracts from this document...

Introduction

Explain why managerial theories of the firm have developed, and how the predictions from these models differ from those of the profit maximising approach? To start this essay I am going to explain a little about the history of the theory of the firm and why managerial theories of the firm have developed. Then I will go on to talk about various models regarded as being important in the evolution from profit maximising to more managerial based theories of the firm, and how the predictions of managerial theories of the firm differ from those of the profit maximising approach. Since the development of Adam Smith's early work on the competitive equilibrium paradigm, which resulted in the neo-classical model of the firm emerging during the second half of the 19th century, many other theories of the firm have developed and become established, which include; the principle-agent, transactions cost, and evolutionary theories as well as what has become known as management theories which are important in the context of the development of modern theories of the firm. The neo-classical model of the firm centres on its assumption that the objective of the firm is to maximise profits. ...read more.

Middle

small, owner managed and competing with a large number of similar firms, profit is a rational objective for two reasons. Firstly, maximisation of profits means maximisation of income for the owner, and secondly, because of the fierce competition in the market, any firm that did not maximise its profits would not be able to survive in business. Economic theory has been served well by the behavioural assumption of profit maximisation. "Because profit is the difference between revenue and costs, once revenue and costs are identified the assumption of profit maximisation enables predictions to be readily made about the consequences of any environmental change." (Hill, 1989, P50-51) Therefore, from a firms costs (derived from a firms production function), and revenues (derived from the demand schedule), the profit function and the output level at which profit is maximised can be obtained from the vertical difference between total revenue and total cost curves. The largest distance between marginal revenue and marginal cost being where profit is maximised, given by output Q. (see appendix 1) "According to this viewpoint, the true objective of the firm is closely related to profit." (Hill, 1989, P.53) As discussed earlier, there has been a move away from the profit maximisation theory of the firm towards more managerial theories, the three most credible ...read more.

Conclusion

happy by maximising their wealth or if there is an active threat of a take-over coming from a drop in share price resulting from a large number of unsatisfied shareholders selling their shares. Depending on how big this threat is and the relative preference of managers for job security and growth, will govern the slope of the supply growth curve. Overall we have seen that the profit maximisation theory and the models in managerial theory, depending on the objectives presumed and the form of constraints operating, generate substantially different comparative predictions. Although, "it has been argued by some economists that the alternatives to profit maximisation,.......... such as growth or sales, or even satisficing models, merely place the organisation in a better position to maximise profits in the long run." (Cook & Farquharson, 1998, P.74) There is little doubt about the attraction of the non-profit maximising theories, but "the assumption of profit maximisation has the enormous advantage of enabling decisions to be modelled simply and sufficiently, and allows decision rules to be developed to cope with a variety of changing circumstances". (Hill, 1993, P. 63) That's why to many people, regardless of the development of more modern theories of the firm, the profit maximising approach is still the most effective predictor of a firms behaviour. ...read more.

The above preview is unformatted text

This student written piece of work is one of many that can be found in our AS and A Level Structures, Objectives & External Influences section.

Found what you're looking for?

  • Start learning 29% faster today
  • 150,000+ documents available
  • Just £6.99 a month

Not the one? Search for your essay title...
  • Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

See related essaysSee related essays

Related AS and A Level Structures, Objectives & External Influences essays

  1. Marked by a teacher

    ASDA's Ownership

    4 star(s)

    * George clothing * Photo shop * Opticians * Kiosk (tobacco, newspapers, lotto etc) and other services Wines Plus only operates locally around South Ealing, and only offers goods ranging from: * Food * Household domestics ( e.g. cleaning liquids, scourers etc)

  2. The Business Environment Coursework. Describe the type of business, purpose and ownership of ...

    Companies need to ensure that they have thought about how their actions affect their stakeholders in different ways, and used that knowledge and information to make the best decision for the business. Sometimes the best decision doesn't always generate the most amount of profit, for example it would reduce costs

  1. "Discuss the assumption that the firm's main motivation is to maximise profits?"

    For example "A survey by Management Today in 1990 asserted that top executives pay was closely related to profit performance" (Applied Economics 7th Ed. p63). Again research by the US Strategic Planning Institute (Schoeffler, Buzzel and Heany 1994) indicates that in the short-run strategic planning support the idea of short-term sales revenue maximization by sacrificing profitability or growth.

  2. Changing Perspectives in Motivational Theories

    He believed that these needs could be met at work (Slattery 2003). This is something that Taylor ignored. Mayo introduced the Human Relations school of thought. Mayo's theory focused on managers taking an interest in their workers and treating them more as people.

  1. Business and Management

    Objectives for improvements for Tesco's are set as the following: * making their shopping trip as easy as possible * constantly seeking to reduce our prices to help them spend less * offering the convenience of either large or small stores * bringing simplicity and value to complicated markets *

  2. Investigating Business. Tesco PLC. I will be describing the aims and objectives of ...

    to customers, and promotion is an important factor as it helps make Tesco?s products & services more aware to the customers so that they can make their decisions in buying them. And Enterprise Skills are important factors as it allows Tesco?s to expand their business, e.g.

  1. Applied Business. Investigating a business Preston Manor High School

    They have to make sure the school is in a healthy environment with healthy food in the canteen. 4 ? Strengthen, monitor and evaluate procedures for performance review staff. The school keeps reports of improvements in school, so they know if there is anything they need to improve.

  2. Identify all the considerations that need to be taken into account when planning a ...

    The leader should also innovate his/her team as this will encourage them to work hard * The Plant- The plant is responsible for coming developing and introducing new proposals; without the plant the business will have nothing to launch into the market so it is vital that the plant is up to scratch.

  • Over 160,000 pieces
    of student written work
  • Annotated by
    experienced teachers
  • Ideas and feedback to
    improve your own work