Firm and Its Objectives

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A.FIRM AND ITS OBJECTIVE:
Conventional theory of firm assumes profit maximization is the sole objective of business firms. But recent researches on this issue reveal that the objectives the firms pursue are more than one. Some important objectives, other than profit maximization are:

(a) Maximization of the sales revenue
(b) Maximization of firm’s growth rate
(c) Maximization of Managers utility function
(d) Making satisfactory rate of Profit
(e) Long run Survival of the firm
(f) Entry-prevention and risk-avoidance

All business firms have undoubtedly some organizational goals to pursue. What is the most common objective of business firms? There is no definite answer to this question. Perhaps the best way to find out the common objective of business firms would be to ask the business executives. However, profit maximization is regarded as the most plausible objective of business firms.

Profit as Business Objectives:Profit means different things to different people. To an accountant “Profit” means the excess of revenue over all paid out costs including both manufacturing and overhead expenses. For all practical purpose, profit or business income means profit in accounting sense plus non-allowable expenses. Economist’s concept of profit is of “Pure Profit” called ‘economic profit’ or “Just profit”. Pure profit is a return over and above opportunity cost, i. e. the income that a businessman might expect from the second best alternatives use of his resources. Sales Revenue Maximisation: The reason behind sales revenue maximisation objectives is the Dichotomy between ownership & management in large business corporations. This Dichotomy gives managers an opportunity to set their goal other than profits maximisation goal, which most-owner businessman pursue. Given the opportunity, managers choose to maximize their own utility function. The most plausible factor in manager’s utility functions is maximisation of the sales revenue. The factors, which...
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