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Alternative Theories
of the Firm
Problems with Traditional TheoryProblems with Traditional Theory
Difficulties in maximising profit non-use of opportunity cost difficulties in identifying demand & MR difficulties in deciding the time period for
maximising profit
Alternative aims separation of ownership and control the principal–agent problem managerial utility maximisation profit satisficing
Alternative Maximising TheoriesAlternative Maximising Theories
Long-run profit maximisation implications for investment and short-run
pricing and output difficulties in testing the theory
Managerial utility maximisation factors determining managers’ utility
salarysecuritydominanceprofessional excellence
implications for firms’ behaviour importance of economic environment
Alternative Maximising TheoriesAlternative Maximising Theories
Sales revenue maximisation (short run) equilibrium output and price
Sales revenue maximising outputSales revenue maximising output£
QO
TR
£
QO
TR
Q1
Sales revenue maximising outputSales revenue maximising output
£
QO
TC
TR
Q1
Sales revenue maximising outputSales revenue maximising output
£
QO
TC
TR
Q2 Q1
Sales revenue maximising outputSales revenue maximising output
Alternative Maximising TheoriesAlternative Maximising Theories
Sales revenue maximisation (short run) equilibrium output and price
effect of a minimum profit constraint
£
QO
TC
TR
Q2 Q1Q3
Total profit
Sales revenue maximising with a profit constraintSales revenue maximising with a profit constraint
Alternative Maximising TheoriesAlternative Maximising Theories
Sales revenue maximisation (short run) equilibrium output and price
effect of a minimum profit constraintimplications for advertising
Alternative Maximising TheoriesAlternative Maximising Theories
Sales revenue maximisation (short run) equilibrium output and price
effect of a minimum profit constraintimplications for advertisingcomparisons with short-run profit
maximising
Alternative Maximising TheoriesAlternative Maximising Theories
Sales revenue maximisation (short run) equilibrium output and price
effect of a minimum profit constraintimplications for advertisingcomparisons with short-run profit
maximising
implications for the consumer
Alternative Maximising TheoriesAlternative Maximising Theories
Sales revenue maximisation (short run) equilibrium output and price
effect of a minimum profit constraintimplications for advertisingcomparisons with short-run profit
maximising
implications for the consumer assessment of the theory
Alternative Maximising TheoriesAlternative Maximising Theories
Growth maximisation
measuring ‘growth’
equilibrium for growth maximising firm?
Alternative theories and the consumer
Multiple AimsMultiple Aims
Satisficing and the setting of targets various possible targets potential conflicts between targets
Behavioural theories of the firms the nature of behavioural theories:
descriptive target setting target conflict and search procedures organisational slack
Multiple AimsMultiple Aims
Predictions of behaviour
conservatism
comparison with other firms
Satisficing and the consumer’s interest
advantages
disadvantages