Importance of Business Economics - Assignment Example

Section A Question Archibald 1987 Theory of Firm Archibald has contributed to the theory of firm by contributing to the introduction of mathematics to economics .he argued that some people did not employ or were not familiar with the concept of marginal revenue and marginal cost for profit maximization. He developed cost -plus pricing which involves firm requests their accountants to estimate the full cost of production per unit output, which include both fixed and variable cost. The final price is therefore determined by adding on a markup to ensure the achievement of the required profit level. However a firm may be unable to estimate its demand curve accurately and consequently the marginal revenue and the marginal cost curves are not accurately estimated. According to the cost -plus pricing the firm adds up its cost and adds a profit margin on the per unit cost of production of a product, and by this way the firm will ensure realisation of anticipated profit, this type of pricing can therefore be used by firms in decision making. Question 2 Devine (1985) on the Traditional Theory of the Firm The traditional theory of firm states that the same principles underlie each decision taken within a firm and that the decision is influenced by who takes it, thus the theory abstracts from the peculiarities of the persons taking the decisions and from the organizational structure in which they were. Therefore according to the traditional theory of firm whenever a firm manager or board of directors of the firm, then as far as the theory takes decisions is concerned that person is the firm for the purposes of that decision. According to devine1985 he reinstated the traditional theory of firm, he viewed participatory economy system as a process in which the value and interest of people in a process of decision making through negotiation and cooperation. This participation in decision-making is seen in two dimensions: Intra-Firm Extra-Firm Intra-firm is concerned with the implication of generalisation within the firm for the mobilization of tacit knowledge to the process through which the firm pursues its activities Extra-firm firm is concerned with the implication of generalized participation outside the firm for the process and criteria that determine which of the entrepreneurial or innovation output of firms are successful. Question 3 Baumol's sales revenue maximizing model. Williasm Baumol developed the sales maximizing model he argues that firms attempts to maximize the revenue obtained from sales with or without a profit constraint. This is motivated by managers in a firm belief that their salaries are related to the size of the firm. The diagram below demonstrates a firm's total cost curve. Total revenue curve and the profit curve. Total revenue curve and the profit curve. Cost & Revenue Total Revenue At point 'P' where total cost curve intersect total revenue curve. The profit value is zero. Where TC = TR then profits are equal to zero. Managers of a firm may be interest in maximizing variables other than profits. The diagram below shows a firms attempts to maximize sales revenue subject to a minimum profit and a firm not subjected to a profit constrain. A firm producing at point Qo maximizes profit this is the point where the profit curve is at it maximum. A firm that has no profit constraint in its production will produce at pointy Q3. A firm with a minimum profit constraint will produce at point Q2, where the minimum profit line interest the profit curve. Section B Behavioural Approach of a Firm This approach was developed by cyert and March in 1963. It emphasizes on explaining how decisions are taken within a firm. This approach is an alternative of the -profit maximization theory. According to Baumol (1959), he suggests that managers would seek to maximize their own utility, managers interests are served by maximizing sales after achieving a minimum level of profit, which satisfies shareholders. It therefore emphasizes that the organizational structure of the firm is likely to influence their behaviours, the decision making process within the firm results to constraints in the firms activity. The decision-making results from a bargaining process within the firm results to constraints in the firm's activity. The decision making results from a bargaining process among members of the firm, this members involved in the bargaining process include managers workers shareholders and even trade unions. These members have different bargaining strengths and conflicting interests. Among these different objectives, the most important is the survival of the firm. Other objectives may include targeted level of profits, Sales, rate of return on capital growth and market share. The attainment level of this target objectives depends upon past level of attainment and the current level of set targets. If the objectives are easily attained, the targets are subsequently raised, if the objectives are proven impossible then the targets are lowered. If a target is not achieved the firm gathers information in order to consider alternative courses of action. An example of this is where a firm experiencing low sales, the firm may reduce its price on the product and if it does not achieve the set target of sales it will choose other alternatives like advertising its products and search of information like advertising its products and search of information on how a new products will improve on its sales. Organization slack is associated with behavior model where members in decision making receive side payments in the form pf monetary awards as result of commitment to a specific policy weakness of the behavior theory of the firm The decision making process of the firm takes place with limited information and subject to a background of uncertainty. This may make it impossible for a firm to make good decisions on the course of actions to take. The information obtained may be misleading. The various objectives emerging from the process of decision-making may conflict with each other. Therefore this process has been termed as satisfying, meaning that the firm attempts to achieve a satisfactory level of attainment of a numbers of objectives,. In this case the objectives could be prioritized in turn or the firm aims at achieving certain levels of each objective. The rise of organizational slack due to members of a coalition receiving side payments in form of monetary awards, which may exceed that necessary to maintain the coalition. Compared the profit maximizing theory that gives us the most 0optimal level of production. The behaviour theory does not direct firms on how to make decisions. On production level. In our world today decisions are made by individual who have common objectives in today's competitive markets, the main objectives of a firm is to maximize profits and the consumers objective is to maximize his utility at minimum cost possible. The behaviour approach only criticizes the profit maximization theory on decision making on output levels of a firm, but if does not give us any solution on how decision making should take place in a firm Reference Hardwick P, Khan B, Langmead J, (1997), An Introduction to Modern Economics, 4 Th Edition, New York, Longman Group UK Limited, Read More