Managerial Theories of the Firm
Managerial theories of the firm
Managerial theories of the firm place emphasis on various incentive mechanisms in explaining the behaviour of managers and the implications of this conduct for their companies and the wider economy.
According to traditional theories, the firm is controlled by its owners and thus wishes to maximise short run profits. The more contemporary managerial theories of the firm examine the possibility that the firm is controlled not by its owners, but by its managers, and therefore does not aim to maximise profits. Although profit plays an important role in these theories as well, it is no longer seen as the sole or dominating goal of the firm. The other possible aims might be sales revenue maximisation or growth.
CLASSICAL THEORIES OF THE FIRM
Profit maximisation
Profit maximisation is the traditional approach to what is the objective of the firm. This theory assumes that the owner of the firm, who seeks to maximise personal wealth, controls the company. In order to maximise personal wealth the owner will seek to maximise the profits of the company (Griffiths and Wall 2001). Profits are maximised where marginal revenue equals marginal cost, that is where the distance between the total revenue curve and the total cost curve is greatest.
In order for the firm to achieve profit maximisation, they need to know the cost and revenue conditions in the market so that marginal revenue and marginal cost can be found. The firm is unlikely to know its demand curve, and it is therefore impossible to obtain a marginal revenue curve. The main problem with maximising profits is therefore the lack of information (Sloman 2000).
MANAGERIAL THEORIES OF THE FIRM
The traditional theory of the firm assumes that it is the owners of the firm that make price and output decisions, but in public limited companies the shareholders are the owners and they elect directors who in turn employ managers. According to the managerial theories there is therefore a
Managerial theories of the firm place emphasis on various incentive mechanisms in explaining the behaviour of managers and the implications of this conduct for their companies and the wider economy.
According to traditional theories, the firm is controlled by its owners and thus wishes to maximise short run profits. The more contemporary managerial theories of the firm examine the possibility that the firm is controlled not by its owners, but by its managers, and therefore does not aim to maximise profits. Although profit plays an important role in these theories as well, it is no longer seen as the sole or dominating goal of the firm. The other possible aims might be sales revenue maximisation or growth.
CLASSICAL THEORIES OF THE FIRM
Profit maximisation
Profit maximisation is the traditional approach to what is the objective of the firm. This theory assumes that the owner of the firm, who seeks to maximise personal wealth, controls the company. In order to maximise personal wealth the owner will seek to maximise the profits of the company (Griffiths and Wall 2001). Profits are maximised where marginal revenue equals marginal cost, that is where the distance between the total revenue curve and the total cost curve is greatest.
In order for the firm to achieve profit maximisation, they need to know the cost and revenue conditions in the market so that marginal revenue and marginal cost can be found. The firm is unlikely to know its demand curve, and it is therefore impossible to obtain a marginal revenue curve. The main problem with maximising profits is therefore the lack of information (Sloman 2000).
MANAGERIAL THEORIES OF THE FIRM
The traditional theory of the firm assumes that it is the owners of the firm that make price and output decisions, but in public limited companies the shareholders are the owners and they elect directors who in turn employ managers. According to the managerial theories there is therefore a
References: Competition Commission (2002) H+H Celcon Limited and Marley Building Materials Limited: A report on the proposed merger Available from: http://www.napier.ac.uk/depts/eco/EC2/Reference.htm (accessed 28.03.05) Douglas, E. (1992) Managerial Economics; Analysis and Strategy 4th ed., Prentice-Hall Inc. New Jersey