pricing to maximise revenues and volumes - Separation of ownership and control - Principal Agent – Highlighted in the 1930’s - Shareholders may incentivise management - Revenue maximisation – why this? - Total revenue test - Price elasticity = Baumol Q - Trigger Price - A strategy set is a string of moves - Neo-classical (market – cost minimisation) vs Managerial model of firm (visible hand of management) - Type influences behaviour = seeking to maximise some objective (indifference curve)
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IMPLICIT MARGINALISM AND FRIEDMAN’S DEFENCE In this section‚ I discuss the implicit understanding of marginalism that emerged in the course of the marginalist controversy and has‚ since then‚ prevailed in orthodox economic theory. The foundation of implicit marginalism was coherently summarized by the following statement by Langholm (1969‚ p.10): The marginal theory of price was never intended to serve as a blueprint for entrepreneurial decision making or indeed to describe or explain in detail what
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Module II: Fundamental Concepts of Managerial Economics * Opportunity Costs‚ Incremental Principle‚ Time perspective‚ Discounting and Equi-Marginal principles. * Theory of the Firm: Firm and Industry‚ Forms of Ownership‚ Objectives of the firm‚ alternate objectives of firm. * Managerial theories: Baumol’s Model‚ Marris’s Hypothesis‚ Williamson’s Model. * Behavioral theories: Simon’s Satisficing Model‚ Cyert and March Model. * Agency theory. * Opportunity cost principle
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traditional model‚ the Marris Model‚ the Williamson Model and the Baumol Model. This write-up will focus on understanding management preferences in terms of price‚ revenue and profit maximization‚ critically evaluate the management model of Baumol and review the extent to which the Baumol model provides a more useful insight into pricing and output decisions of modern management. In conclusion‚ how low cost airlines apply the Baumol model in terms
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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
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Is Profit Maximisation always the major objective of a firm? The production of goods and services in our economy today takes place within organisations‚ whether in the centrally planned economy or free market economy. Any firm within these societies all have the same tendencies to acquire a successful business. Attaining this succession through mission statements‚ goals and objectives is simultaneous through all businesses. Changes in these objectives can have forcible effects on the decisions
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stakeholders - interests and power Common and conflicting interests of stakeholders The different stakeholder groups have different interests some in common with other stakeholders and some in conflict. Examples of common interests: * Shareholders and employees have a common interest in the success of the organisation. * High profits which not only lead to high dividends but also job security. * Suppliers have an interest in the growth and prosperity of the firm. Examples
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Manager is anyone who responsible for the work of other people. Stewart (1988) defines manager as those above a certain level in the hierarchy‚ usually those above foreman level on the works side and those above the first level of supervision in the offices. Managerial behaviour is the behaviour that can be reported‚ whether from observation by others or by self-reports. Managerial objective is the aim that a manager of a firm wants to achieve. In perfect markets a proper managerial objective is
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Marris’ Model of Managerial Enterprise The goal of the firm in Marris’s model is the maximisation of the balanced rate ’of growth (g) of the firm. The growth depends on the growth of demand for the products of the firm (gD) and the growth of its capital supply (gc)’ Maximise g = gD = gc In pursuing this balanced growth rate‚ the firm has two constraints. Firstly‚ the managerial constraint set by the available ’managerial team and its skills‚ and secondly‚ the financial constraint set by
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THE THEORY OF THE FIRM Notes by:Ramon Somar THE THEORY OF THE FIRM Even though managerial economics is not concerned solely with the management of business firms‚ this is its principal field of application. To apply managerial economics to business management‚ we need a theory of the firm‚ a theory indicating how firms behave and what their goals are. The concept of the firm plays a central role in the theory and practice of managerial economics. An understanding of the reason for the existence
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