I BBA: MANAGERIAL ECONOMICS
ECONOMIC OBJECTIVES OF FIRMS
MEANING:
A firm is the business unit involved in producing the profit. Business (company,
enterprise or firm) is a legally recognized organization designed to provide goods or
services or both to consumers, businesses and governmental entities. It is typically
formed to earn profit that will increase the wealth of its owners and grow the business
itself. A business can also be formed as not-for-profit or be state-owned.
Types of firms
Sole proprietorship:
A sole proprietorship is a business owned by one person. The owner may
operate on his or her own or may employ others. The owner of the business has
personal liability of the debts incurred by the business.
Partnership:
A partnership is a form of business in which two or more people operate for the
common goal which is often making profit. Each partner has personal liability of the
debts incurred by the business.
Corporation:
A corporation is either a limited or unlimited liability. It has a separate legal
personality from its members. It is owned by multiple shareholders and is overseen
by a board of directors, which hires the business's managerial staff. In addition to
privately owned corporate models, there are state-owned corporate models.
Cooperative:
Often referred to as a "co-op", a cooperative is a limited liability entity that can
organize for-profit or not-for-profit. A cooperative differs from a corporation in that it
has members, as opposed to shareholders, who share decision-making authority.
Cooperatives are typically classified as either consumer cooperatives or worker
cooperatives. Cooperatives are fundamental to the ideology of economic democracy.
OBJECTIVES OF FIRMS
The business firms and the other business entities are guided by certain
objectives. Profit maximization has been one the prime objectives of the private
business enterprises. Later on, in recent times new theories of business firms have
generated alternative objectives of firms. The main objectives of firms are:
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1. Profit maximisation
2. Sales maximisation
3. Increased market share/market dominance
4. Social/environmental concerns
5. Profit satisficing
These objectives can be classified into two main categories, which are:
I. Economic objectives
II. Social objectives
I. ECONOMIC OBJECTIVES OF BUSINESS
1. PROFIT MAXIMIZATION:
Business is a set of activities undertaken with the purpose of earning a profit.
Profit is the extra income over the expenses. The main objective of any business is to
earn a profit. Because profit is the measure of a firm's welfare. In order to maximize
the profit, the firm has to meet certain conditions:
Profit = Total Revenue (TR) – Total Costs (TC).
Therefore, profit maximisation occurs at the biggest gap between total revenue
and total costs.
A firm can maximise profits if it produces at an output where marginal revenue
(MR) = marginal cost (MC).
2. SALES MAXIMISATION
Firms may choose to produce more and achieve maximum revenue or
maximum sales instead, in the interest of its own survival. Sales are maximised
by reducing the price to the lowest level possible. This could give an advantage
to the businesses in the industry. It could even be a source of monopoly power.
A good example of this would be [Link].
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Sales are maximised at the point AR=AC. Sales maximisation is associated with
‘managerial’ theories, which stress the importance of management decision making
in large organisations.
3. MARKET SHARE / CREATION OF CUSTOMERS
In the long run, the survival of the business completely depends upon
the market share captured by the business. The creation of good and satisfaction of
the needs of the customer is a crucial purpose of the business. So to generate profit and
demand, the business must supply premium quality and give value for money products.
4. INNOVATION & UTILIZATION OF RESOURCES
Innovation means creating more effective processes, products and ideas.
Nowadays, business is ever-changing and dynamic. To keep up with the growing
competition a businessman has to introduce efficient design, latest trends, upgraded
machinery, new techniques, etc. Large scale companies invest a huge amount of capital
for Research & Development department to boost innovation.
5. INCREASING PRODUCTIVITY
Productivity is a scale to measure the efficiency of the business activity. Each
business must go for more prominent productivity – to guarantee its survival and
development. This goal can be accomplished by decreasing wastages and making
proficient utilization of machines and supplies, HR, cash and so forth.
II. SOCIAL OBJECTIVES OF BUSINESS
Business is one of the pillars on which the society stands. It earns its income
from the sale of products and services to the society. It is mandatory on the part of the
business to take care of the social factors. The necessary social objectives of a business
are as follows:
1. PROVIDING GOODS & SERVICES AT REASONABLE PRICES
Business objects to satisfy the needs of the society. It’s the first and major social
objective of the business. Products and services should be of better quality to be
provided at fair price. It is additionally the social commitment of business to keep away
from misbehaviours like boarding, black marketing and false advertising.
2. EMPLOYMENT GENERATION
Business generates employment opportunities in the society. It leads to economic
development of individuals and the nation.
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3. FAIR REMUNERATION TO EMPLOYEES
The people on the inside of the business are more valuable i.e. employees. They
are an asset of the business and make a ground-breaking contribution to the business.
They must be given reasonable pay for their work. Apart from wages and salary, a
portion of profits should be distributed as bonus recognizing their hard work. Such
benefits will expand the inspiration and proficiency of employees.
4. COMMUNITY SERVICE
Business must give back something to the society. As a result, a business can
make and help Library, dispensary, educational foundations and so on to the
advancement of society. It can build schools, colleges, libraries, hospitals, sports bodies
and research institutions. They can help non-government organizations (NGOs) which
render services to weaker sections of society.
Role in Managerial Decision Making
Managerial economics leverages economic concepts and decision science
techniques to solve managerial problems. It provides optimal solutions to managerial
decision making issues of Managerial Economics.
1. Studies Business Environment:
Managerial economics properly analyses the external environment of the
business. These factors should be considered while taking any decisions and framing
policies. Managerial economic studies all factors like economic situation, government
policies, price trends, national income growth, etc.
2. Production Scheduling:
Managerial economics manages and prepare schedules for all production
activities of business. It estimates all future demands using various quantitative tools
which helps in making production plans.
3. Control Cost:
Controlling the cost is vital for achieving the desired profitability and growth.
Managerial economics estimates the cost of all business activities and identify all
those factors that cause variations in cost from time to time. It aims at minimizing
the cost through optimum utilization of all resources.
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4. Set Prices:
Setting fair price of a product or service is a very challenging task for every
business organization. Managerial economics helps management in fixing the correct
price by supplying all information regarding competitors pricing methods.
5. Bring Coordination:
Managerial economics brings coordination and flexibility in all operations of the
business. It supports effective decision making by providing all relevant data using
economic theories and tools.
6. Investment Analysis:
Managerial economics ensures that all business funds are allocated to
profitable means. It properly analyses the profitability of all investment avenues
before investing any amount into it.
7. Capital Management:
Capital management is one of the important functions played by managerial
economics. It manages and analyses all capital expenditures of business which
involves huge expenditures. Before investing any amount, it measures the
profitability of such a source for allocating funds.
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