Outline briefly the managerial criticisms of the profit maximising firm - Compare and contrast the Neo-classical profit maximising model with the management model of Baumol.

In order for any business to be successful they would need to know how to make the most profit for the goods they are producing and selling.

If a company can make a profit with low expenses, then they have succeeded in profit maximization. Companies strive to make a profit, but if they can reach their profit maximization then that’s even better.

Throughout this task I will do my best to explain how firms determined to maximize profit do just that. Specifically I will delineate how such firms choose the optimum level of production or output for the goods they produce and how they behave with respect to various elevations of marginal revenue. In my attempt it will be appropriate for me to clarify the definitions of various economic terms in order to assure a proper understanding of my thoughts on this topic, I will provide these definitions throughout.

A purely competitive firm is precluded from making economic profits in the long run because:

Decisions will be made by using the concepts of marginal costs and marginal revenue to maximize profit. A mix of pricing and non-pricing strategies will be

In addition, firms may want to profit maximise and gain supernormal profits because it would attract potential competitors to join their market. This is because companies such as apple, gain too much supernormal profit, it attracts other firms, such as Samsung and Orange, to join their market and share their supernormal profits. So companies may want to sacrifice their profits in the short run to prevent unwanted competitors in joining their market in order to gain supernormal profits in the long run. However this only occurs in imperfect competition because most firms only make supernormal profits in the short run and normal profits in the long run. Also a non- maximising behaviour by a firm is usually disciplined by competition in the capital market rather by competition in the goods or products market. In the capital market, if the shareholders aren’t happy with the firm’s behaviour of non profit maximising, they would sell their shares and, if a firm’s level of profits is too low, the owners may sell their business to a new owner. This would then mean managers may want to

They went on to state that competition would not solve this dilemma. This lead to a re-evaluation of the goal of corporations, from merely maximizing revenues, to maximize the value of the firm, as it was determined in the stock market.

Based on eq.5, we can make several observations of the properties of Cournot competition. First, given positive market share, firms in Cournot market have the market power to price higher than their marginal costs. Second, the market power of a firm is limited by the market elasticity of demand. The more elastic demand,

The model consists of two firms who set prices simultaneously and independently (HUGH GRAVIELLE AND AY REES, MICROECONOMICES), jean tiral explains this as when one firm sets its price it is ignorant to its rival’s price, rather it “anticipates” what they will charge. It is assumed products are homogeneous and perfect substitutes (ECCSTRAT) and due to the nature of the product the firm supplying output at the lowest price will gain

In business it is essential for owners to consider important factors when mapping out their business objectives. Economics used as a tool to solve coordination problems. They include what and how much product to produce, how to produce their product, and for whom they are producing. In order to effectively answer these questions, economics is used. Colander (2006) describes economics as “the study of how human beings coordinate their wants and desires, given the decision-making mechanisms, social customs, and political realities of the society” (p. 4). The foundation of economics is based on several factors that assist in understanding an economy.

Coase’s main points brought together in his introduction and additional notes, but drawn from his scholarly articles begin with the concept that the choice between how a firm is organized and how the market is organized is varied and will continue to be varied, but not because of changes in technology. Instead, both individual firms and the market as a whole are organized so that each attempts to minimize or economize inherent transaction costs. Coase goes on to explain that the study of these tangible and material transaction costs is actually a study of opportunity cost. Charlie Munger, Warren Buffet’s less media attention grabbing partner, explains opportunity costs very succinctly and points a finger in the eye of economic professors; “Everything is based on opportunity costs. Academia has done a terrible disservice: they teach in one sentence in first-year economics about opportunity costs, but that’s it. In life, if opportunity A is better than B, and you have only one opportunity, you do A. ” This is Coase’s point, that firms and the market deal with the information at hand and make decisions in a world of scarce resources. Given a choice between A and B, then the one with the maximized value will be logically chosen every time. If in the real world study of a firm or market that the logical choice wasn’t chosen, then the economist has not values all the tangible benefits and costs that were weighed by decision makers,

To analyze this approach is vital to take into account the concept of capitalism, this is a system in which the main and the only objective is to profit. In capitalism the power and the decision making are based on the ones who own the factors of production, so it depends on what they need or what they want to make changes; changes that are going to bring benefits to

When managers are seeking to earn maximum profit, they apply the maximax rule regardless of the potential risk it involves. Business dictionary defines maximax rule as, “the optimistic (aggressive) decision making rule under conditions of uncertainty.” Nonetheless, the business owner or leader that oversees making important decision are responsible for choosing the plan of action feasible in the given situation. The downside of this rule is the high risk it contains. The individuals making the decisions must take other steps to prevent the possible risks by weighing their options. Through investigating procedures business owners and leaders can also eliminate some of the risks. Managers choosing the different alternative by applying the maximax rule, are aware that

Profit price based organizations are based around two main ideas one is target return and the other is maximizing profit (From the expert: Price objectives or orientation. (n.d.). Maximizing profit is a challenging aspect in business because the company needs to find a price point at which customers are happy, while also maximizing returns and profit. The company that comes to mind is Reliance Steel and Aluminum Co. Reliance is the largest metal service center in the world and now is over a 10 billion dollar fortune 500 company. Reliance sells steel B2B on a daily basis with the intention of maximizing profits.

In the short run the perfect competition equilibrium can be found by graphing the marginal cost (MC), average total cost (ATC) and marginal revenue (MR) curves. In perfect competition the price is equal to the average revenue, which is equal to the marginal revenue and these are all constant, giving an infinitely elastic demand curve for the firm. The demand curve is “perfectly price elastic” due to the homogeneity of the products supplied, where each supplier, as a price taker, must focus on a single price. Given this, the only choice a supplier has in the short run is how much to produce. For profit maximisation to occur marginal costs (supply curve) must equal marginal revenue (demand curve). Profit maximisation is assumed to mean the maximisation of normal economic profit (i.e. revenue that covers the