The traditional theory does not distinguish between owners and managers’ interests. The recent theories of firm, which are also called managerial and behavioral theories of firm, assume owners and managers to be separate entities in large corporations with different goals and motivation. In this section, some important alternative objectives of business firms, especially of large business corporations are also discussed. 1. Baumol’s Hypothesis of Sales Revenue Maximization According to Baumol, “maximization of sales revenue is an alternative to profit maximization objective“. The reason behind this objective is to clearly distinct ownership and management in large business firms. This distinction helps the managers to set their goals other than profit maximization goal. Under this situation, managers maximize their own utility function. According to Baumol, the most reasonable factor in managers utility functions is maximization of the sales revenue. The factors, which help in explaining these goals by the managers, are following: Salary and other earnings of managers are more closely related to seals revenue than to Continue reading
Economics Basics
Gaps between Theory of the Firm and Managerial Economics
The theory of the firm is a body of theory, which contains certain assumptions, theorems and conclusions. Theory of the firm states that firms (corporations) exist and make decisions in order to maximize profits. These theorems deal with the way in which businessmen make decisions about pricing, and production under prescribed market conditions. It is concerned with the study of the optimization process. For optimality to exist profit must be maximized and this can occur only when marginal cost equals marginal revenue. Thus, the optimum position of the firm is that which maximizes net revenue. Managerial economics, on the other hand, aims at developing a managerial theory of the firm and for the purpose it takes the help of economic theory of the firm. However, there are certain difficulties in using economic theory as an aid to the study of decision-making at the level of the firm. This is because Continue reading
Benefits of Cost Volume Profit Analysis
Every organization needs to calculate future revenues in order to help the managers carry out their operations effectively. Cost volume is the approach used for this purpose. Cost Volume Profit analysis or CVP analysis helps in identifying the operating activity levels with a purpose to avoid any kind of losses and achieve profits. Moreover, it also helps the companies to plan their future operations and see whether their organizational performance is going on the right track or not. While conducting a business, the companies also have to face various risks and in order to counter those risks, CVP analysis is an effective tool. Cost volume profit analysis can also help the organizations in calculating the breakeven point which is the point at which the profits become equal to zero. This can be done by finding the break even volume and then using it to make graphical representations. The break even Continue reading
Cashless Economy – The Road Towards a Cashless World
A cashless economy is a system where payments are made by electronic means rather than using cash or check to pay for goods or services. In an economy that is “cashless”, a person would pay with plastic methods like credit cards, debit cards, or smart cards. This type of transaction electronically moves money from one account to another rather than using the traditional forms of exchanging printed currency or checks. Woodfords Model of Cashless Economy There has been much debate over Woodford’s model of a cashless economy by many experts in the field of economics. Most experts believe that although some of the ideas brought forth make sense, the model is still incomplete because, in real-world economics, central banks can affect nominal interest rates. In Woodford’s model, he assumes that this does not relate to the real-world economy. Woodford’s argument is that banks have committed themselves to straightforward objectives to Continue reading
Theories of Profit in Economics
In economics, profit is called pure profit, which may be defined as a residual left after all contractual costs have been met, including the transfer costs of management insurable risks, depreciation and payment to shareholders, sufficient to maintain investment at its current level. Theories of Profit in Managerial Economics There are various theories of profit in economics, given by several economists, which are as follows: 1. Walker’s Theory of Profit as Rent of Ability This theory is pounded by F.A. Walker. According to Walker, “Profit is the rent of exceptional abilities that an entrepreneur may possess over others”. Rent is the difference between the yields of the least and the most efficient entrepreneurs. In formulating this theory, Walker assumed a state of perfect completion in which all firms are presumed to possess equal managerial ability each firm receives only the wages which in Walker view forms no part of pure Continue reading
The Great Depression – Facts, Causes, and Effects
The Great Depression is a term denoting the economic crisis that emerged in the United States and some European countries. The crisis began in 1929 and continued until the end of the 1930s. The term “depression” is mostly used to refer to events solely in the U.S., where virtually entire American nation was particularly strongly affected by a depressive state in addition to the economic decline. The term “global economic crisis” is commonly used for other countries that have experienced the same events (UK, Germany, France, and other European countries to a lesser extent). Large industrial cities had suffered the most from the crisis, but rural areas were also affected. Crises in world history occur from time to time. However, according to the researchers, the Great Depression is one of the most prolonged crises in the history of the industrialized countries. It is considered that it started with the collapse Continue reading