Managerial Economics- Types of Firm, Objectives of a Firm i.e Sales Maximization, Profit Maximization,Utility Maximization ,Welfare Maximization, Growth Maximization

1. MANAGERIAL ECONOMICS-
OBJECTIVES OF A FIRM
MANAGERIAL ECONOMICS
By- Ms. Pooja

2. Firm and its Objective

5. 1. Sales maximization

6. Baumol’s Sales Maximization
SALES MAXIMISATION
 According to Baumol, with the separation of ownership
and control in modern corporations, managers seek
prestige and higher salaries by trying to expand company
sales even at the expense of profits.
 The objective of sales maximization with minimum profit
can be easily understood with the Fig. Where:
TC- Total Cost.
TR- Total Revenue.
TP- Total product.
 Sales maximize where Average cost = Average Revenue.
As you can see in next slide..

7. Sales max.
where AC=AR

8.  Sales maximization is not only a means but an end in
itself.
 He gives a number of arguments is support of his theory.
According to him, a firm attaches great importance to the
magnitude of sales and is much concerned about
declining sales.
 If the sales of a firm are declining, banks, creditors and
the capital market are not prepared to provide finance to
it. Its own distributors and dealers might stop taking
interest in it. Consumers might not buy its products
because of its unpopularity. But if sales are large, the size
of the firm expands which, in turn, means larger profits.

9. 2.Profit Maximization

10. Profit Maximization
 Traditionally it is the main objective of a firm. According to
this a firm prefers to produce at that point where it can make
maximum of profit. To gain that level of production a firm
may follow to different rules i.e. total revenue, total cost rule
and marginal cost marginal revenue rule.
 According to the total revenue and total cost method, a firm
produces to that extent where there is a maximum difference
between total revenue and total cost.

11.  According to marginal cost and marginal revenue
rule, a firm produces to that extent where
marginal revenue and marginal cost are equal.
 Before the equilibrium output MR is more than the
MC and a firm which wants to maximize its profit
wants to earn every profit on each and every unit. It
wants to earn maximum profit on the whole.

12.  Keep shareholders happy
 Re-investment opportunities
 Greater efficiency
 Lower cost, lower prices

13. CRITICISM
HOWEVER, IN PRACTICE IT IS NOT POSSIBLE FOR A FIRM TO
MAKE MAXIMUM OF THE PROFIT IN THE LONG RUN DUE TO
FOLLOWING REASONS.
1. Firstly, firms do not make maximum profit because it may attract
new firms, hence competition will be increased.
2. Secondly, firms are reluctant to make maximum profit to avoid
government watch dogs And greater risk of investigation which
involves huge cost.
3. Thirdly, it may damage the relationship between stakeholders,
such as consumers and workers.
4. Fourthly, it may be possible to the certain scale of production, but
it is difficult to calculate MR and MC in mass production.
Profit maximization is also not possible in service sector

15. Williamson’s Utility Maximization:
 Williamson has developed managerial utility-
maximisation objective as against profit maximization.
 In large modem firms, shareholders and managers are
two separate groups. The former want maximum return
on their investment and hence the maximization of
profits
 The managers, on the other hand, have consideration
other than profit maximization in their utility functions.
Thus the managers are interested not only in their own
emoluments but also in the size of their staff and
expenditure on them.

16. CONT….
 Thus Williamson’s theory is related to the
maximization of the manager’s utility which is a
function of the expenditure on staff and
emoluments and discretionary funds. “To the
extent that pressure from the capital
market and competition in the product
market is imperfect, the manager,
therefore, has discretion to pursue goals
other than profits.”

18. MARRIS GROWTH MAXIMIZATION:
 Robin Marris in his book The Economic Theory of
‘Managerial’ Capitalism (1964) has developed a dynamic
balanced growth maximizing theory of the firm.
 The managers aim at the maximization of the growth rate
of the firm and the shareholders aim at the maximization of
their dividends and share prices.
 To establish a link between such a growth rate and the
share prices of the firm, Marris develops a balanced growth
model in which the manager chooses a constant growth
rate at which the firm’s sales, profits, assets, etc., grow.

19. Cont…
• As the managers are concerned more about their job
security and growth of the firm, they will choose that
growth rate which maximizes the market value of
shares, give satisfactory dividends to shareholders, and
avoid the take-over of the firm.
• On the other hand, the owners (shareholders) also
want balanced growth of the firm because it ensures
fair return on their capital. Thus the goals of the
managers may coincide with that of owners of the firm
and both try to achieve balanced growth of the firm.

20. Marris’ growth-maximization theory has
been severely criticised for its over-
simplified assumptions.
1. It ignores the problem of oligopolistic interdependence of
firms.
2. The model assumes that firms can grow continuously by
creating new products. This is unrealistic because no firm
can sell anything to the consumers. After all, consumers
have their preferences for certain brands which also change
when new products enter the market.
3. The assumption that all major variables such as profits, sales
and costs increase at the same rate is highly unrealistic.
4. It is also doubtful that a firm would continue to grow at a
constant rate, as assumed by Marris. The firm might grow
faster now and slowly later on.

23. Other Objectives
 Survival
 Public Sector Organization

26. •THANK YOU