What is nature of the firm?
Meaning of Nature of the Firm: – A firm is an association of individuals who have organized themselves for the purpose of turning inputs into output. The firm organizes the factors of production to produce goods and services to fulfill the needs of the households. Each firm lays down its own objectives which is fundamental to the existence of a firm. Since the market is “effective” (i.e., those who are better at delivering each product or service for the lowest price are already doing so), conventional economic theory at the time proposed that contracting out could often be cheaper than hiring.
Market has a variety of transaction fees; the cost of buying a product or service through the marketplace is usually higher than the price of a good. Other expenses, such as search and intelligence costs, negotiating costs, trade secret protection, and police and compliance costs, can all theoretically increase the cost of acquiring something in the marketplace. This implies that companies will emerge when they can organize to manufacture what they require internally and therefore avoid these costs. However, there is indeed a finite limit on how much can be generated internally.
Reduced returns to the entrepreneur feature, including higher overhead costs and a greater likelihood for an overworked manager to create resource allocation errors. This is a cost of doing business with the company. Finding an optimal equilibrium between the conflicting patterns of the costs described above determines the size of a company (as determined by how many contractual ties are “internal” to the firm and how many are “external”). In particular, expanding the business would be beneficial at first, but the declining returns listed above should start kicking in, prohibiting the company from expanding indefinitely.
Other things being equal (ceteris paribus), a firm will appear to be larger: –
- The lower the rise in errors with an increment in the amount of trades coordinated, the less probable the businessman is to make errors.
- The lower the supply price of factors of output to larger businesses, the greater the decrease (or decrease).
What are the objectives of a firm?
There are occasions when goals overlap. Growing market share, for example, can result in lower profit in the near term but allow profit maximization in the longer term.
The main objectives of a firm are: –
- To achieve the Organizational Goal,
- To maximize the Output of the firm,
- To maximize the Sales of th firm,
- To maximize the Profit of the Organization,
- To maximize the Customer and Stakeholders Satisfaction,
- To maximize Shareholder’s Return on Investment,
- To maximize the Growth of the Organization.
- Firms are established to earn profit, to keep the shareholders happy. To increase their market share, they try to maximize their sales. In the present business world firms try to produce goods and services without harming the environment.
What is profit maximization?
Meaning of Profit Maximization: – Short-term or long-run process by which a firm can determine the price, input and output levels that can lead to the highest profit is called profit maximization. Firms are established to earn profit, to keep the shareholders happy. To increase their market share, they try to maximize their sales. Profit maximization is the ability of a business or company to earn maximum profit with low cost which is considered as the main goal of any business and also considered as one of the objectives of financial management.
In the present business world firms try to produce goods and services without harming the environment. Firms are not always able to operate at a profit. They may be facing the operating loss also. Economists believe that firms maximize their long run rather than their short run profit. So managers have to make enough profit to satisfy the demands of their shareholders and to maximize their wealth through the company.
- In economics, we generally believe that companies are only interested in making a profit.
- Increased benefit translates to increased dividends for shareholders.
- More benefit will be used to fund research and innovation.
- Profitability increases the firm’s resistance to takeover.
- Higher profits allow for higher wages for employees.
What are co-operatives?
Meaning of co-operatives: – An autonomous association of individuals united to fulfill their common economic, social, and cultural needs and aspirations through a jointly owned and democratically controlled enterprise is called co-operatives.
Co-operatives are businesses owned and run by their members. Whether the members are customers, employees or residents they are everyday people who have an equal say in what the business does and a share in the profits.
Co-operatives are based on the values of self-help, self-responsibility, democracy, equality, equity and solidarity. In the tradition of their founders, co-operative members believe in the ethical values of honesty, openness, social responsibility and caring for others.
Co-operatives might well have entirely different goals than a traditional PLC. A co-operative is managed with the goal of maximizing the wellbeing of all stakeholders, particularly workers. Any profits made by the cooperative would be distributed to all participants.
What is profit satisficing?
Meaning of profit satisficing: – Profit satisficing is a situation where there is a separation of ownership and control. As a result, owners are likely to have different objectives to the managers and workers. In short, owners want to make maximum profits, but workers and managers cannot. This is an example of the ‘principal-agent’ problem, called profit satisficing.
Profit Satisficing refers to an economic strategy that focuses on achieving satisfactory profits rather than optimizing profits. This strategy can lead to suboptimal outcomes for all parties involved. Profit Satisficing is a term used in business to describe the act of making decisions that are good enough for the company but not necessarily perfect.
Satisficing is the act or process of producing goods /services that are sufficient to meet the standards of production in the eyes. When we have a clear objective and set standards for production, it becomes a lot easier to understand what constitutes good quality products and all other aspects of the product and our expectations for the products we provide to the customer.
When we have clear objectives and production standards, it also becomes easy to understand what the customer’s expectation is from our company. The best way to achieve this is through proper planning. Our production needs to be in line with our sales figures and the set objectives. We can then fine-tune our plan based on the actual performance.
The company’s owners (shareholders) are rarely interested in the day-to-day operations of the company. This is a concern as, while owners also might want to maximize income, management have far less motivation to do so because they may still not receive the same incentives (share dividends). As a result, managers may achieve a minimum amount of profit to maintain shareholders satisfied, but then focus on other goals, such as enjoying work and getting along with co-workers. (For example, not dismissing them) This is a dilemma created by the division of owners and managers. This ‘principal-agent’ issue can be mitigated to some degree by providing managers with stock options and performance-based compensation, though productivity can be hard to quantify in some industries.
What are social and environmental concerns?
An environmental issue in managerial economics refers to the general business environment in which the firm operates. They refer to the general economic, social and political environment within which the firm operates.
A study of economic environment should include: –
- The type of economic system in the country;
- The general trends in production, employment, income, prices, saving and investment;
- Trends in the working of financial institutions like banks, financial corporations,insurance companies;
- Magnitude and trends in foreign trade;
- Trendsin labour and capital markets;
- Government’s economic policies viz. industrial policy monetary policy, fiscal policy, price policy etc.
The social environment refers to social structure as well as social organization like trade unions, consumer’s co-operative etc. The Political environment refers to the nature of state activity, chiefly states’ attitude towards private business, political stability etc. The environmental issues highlight the social objective of a firm i.e.; the firm owes a responsibility to the society. Private gains of the firm alone cannot be the goal. The environmental or external issues relate managerial economics to macro-economic theory while operational issues relate the scope to micro-economic theory. The scope of managerial economics is ever widening with the dynamic role of big firms in a society.
Increased market share/market dominance
To increase market share means increasing the effort you put into sales as a business, and using new or additional strategies to help you get there. So, to increase your market share, you need to make more sales than your competitors to increase your share in the industry. A higher market share typically means more sales, less effort for more sales, and a stronger barrier to entry for other competitors. A higher market share also means that if the market expands, the leader gains more than others.
- This is close to revenue maximisation, and it may include mergers and acquisitions. With this goal in mind, the company might be able to accept lower profit margins in order to grow in size and gain market share. With more share of the market, it gains monopoly control and the right to set rates.
- Firms can compromise brief profits in order to increase long-term profitability in the some instances. Firms may lose money in the short run by investing heavily in new capability, but they can make more money in the long run.
What is sales maximization?
Meaning of sales maximization: – A firm has a theoretical objective in which it is possible to sell multiple units of a good or service, without loss is called sales maximization. To increase market share means increasing the effort you put into sales as a business, and using new or additional strategies to help you get there. So, to increase your market share, you need to make more sales than your competitors to increase your share in the industry.
- Firms often strive to maximize their share of the market, even though this means sacrificing profit. This could happen for a variety of reasons:
- Increased market share boosts monopoly strength, enabling the company to raise rates and benefit more in the long run.
- Managers tend to work with larger firms because it provides them with more credibility and better pay.
- Rising market share has the potential to drive competitors out of business. For example, the growth of supermarkets has resulted in the closure of many small businesses. Some companies can engage in aggressive pricing, which involves taking a loss in order to push a competitor out of business.
What is rationale of the firm?
Organizing activities through the hierarchy of the firm is often more efficient than market exchange, because production requires the coordination of many transaction among many resource owners. The firm organizes the factors of production to produce goods and services to fulfill the needs of the households. Each firm lays down its own objectives which is fundamental to the existence of a firm. The firm is favored means of production when the transaction costs involved in using the price system exceed the cost of organizing those same activities through direct managerial controls within a firm.