MCom I Semester Managerial Economics Business Firm Study Material Notes
Table of Contents
MCom I Semester Managerial Economics Business Firm Study Material Notes: Meaning and Definition of business Firm Objectives or Business Firm Profit Maximisation is not Always the Aim Objective of Business Firm ( Most Important Notes for MCom I Semester )
MCom I Semester Analysis Statistical Quality Control Study Material Notes
MEANING AND DEFINITION OF BUSINESS FIRM
The subject matter of the study of Managerial Economics are the activities of a Firm. Due to this reason, Managerial Economics is known as the Economics of Firm. Economics of Firm means the study of those economic principles which are helpful in simplifying the activities of a Firm but Managerial Economics is not concerned only with the study of these economic principles but it also concerned with their practical use. In addition to this, Economics of Firm rests upon certain assumptions while Managerial Economics tries to find out some solution of the problems of a Business Firm.
A Business Firm is a technical economic unit which is engaged in the production of or purchase and sale of goods and services. A business firm may be organised as sole trade or partnership firm or joint stock company or a corporation. Whatever may be the firm of the organisation of business firms, their object is to provide goods and services to the people. In the words of Prof. Allen. “A business firm is a legal form of the ownership of assests and contractual relations which is engaged in the production and sale of goods and services with a view to increase the worth of propritors.
On the basis of above discussion, it may be concluded that a Business Firm is an economic unit which is engaged in the production or distribution or both the production and distribution of goods and services for the purpose of earning profits
Business Firm Study Material
OBJECTIVES OF BUSINESS FIRM
Every business firm has some objectives for which it always endeavours to attain in the best possible manner. Following are the important objectives of a business firm:
1 To Maximise Total Profits. Main object of every business firm is to earn maximum profits. All the efforts of a firm are directed towards the achievement of this object. A firm can earn maximum profits at the point where Marginal Cost (
2. MC) and Marginal Revenue (MR) are equal. Marginal Cost means the cost incurred on the production of an additional unit o commodity. Marginal Revenue is the revenue received from the sale of such additional unit.
3. To Maximise Total Sales Revenue. Second most important object on a business firm is to obtain maximum sales revenue. The attainment of this object does not mean to have the maximum sale in terms of physical quantity but it means to obtain the maximum amount of revenue through sales. A firm can obtain maximum sales revenue at the point when its Marginal Revenue is Zero. No firm will like to increase its sales beyond this point, because beyond this point, the firm will be suffering a loss.
4. To Minimise Cost. Another important object of a business firm is to minimise the cost of production of producing goods and services so that these goods and services may be provided to the consumers at minimum possible price. To attain this object, the business firm makes continuous use of various techniques of cost control.
5. To Establish Long-run Survival. According to Rothschild, “Main objective of a firm is to obtain the stage of long-run survival. A firm having this aim is always very cautious and its all decisions are safety-oriented. Such firms do not like to reap larger profits in short-run but prefer lower profits in the long-run.” Thus, long-run survival is a prime object of all the business firm. For this purpose, every firm makes best efforts to provide best quality of goods and services to its consumers at reasonable prices. Some business firms change their marketing strategies and marketing approach from time to time so that they may maintain the demand of their products in the market.
6. To Achieve Financial Soundness. No business firm can continue for long time if it is not financially sound. Banks and Financial Institutions stress upon financial soundness of the firms to grant them any sort of financial assistance. Therefore, every business firm takes due care and precaution in the use of funds of the firm.
7. To Achieve Economics Self-sufficiency. A business firm cannot be successful in achieving its objects if it depends only upon external sources for the programme of expansion and diversification. A firm should be self-dependent in economic affairs. If complete self-dependce is not possible. dependence on external financial sources should be minimum. For this purpose, all the business firms try to re-invest major part of their profits in their business.
8. To Provide Maximum Welfare and Satisfaction to Employees. Some business firms aim at providing maximum facilities to their employees so that they may get maximum job satisfaction and their efficiency and ability may be increased. Such firms spend huge amount on the welfare of their employees. The facilities of proper working conditions, canteen, education, training, incentive wage system, bonus etc., are provided to the employees. This is an important object and very helpful in the achievement of pre-determined objectives of the firm because if the employees of a firm are satisfied they will contribute their best efforts to achieve the objectives of the firm
9. To Establish Business Empire. Some business firms have an object of dominating the whole market. Such firms provide goods and services to consumers at the lowest possible price. They provide best after-sale-services to the consumers. Such firms also aim at selling product to the maximum number of customers so that they can capture the market and establish their business empire.
Thus, it is clear that there are many important objectives of a business firm. A firm can have any one or more of above objects but the basic aim is always to earn maximum profits and all the activities are directed towards the achievement of this object.
Q.2. “Profit Maximisation is not always the aim of a Business Firm.” Discuss. Or What are the assumptions underlying the Profit Maximisation Hypothesis about the objective of a Firm ? Are these assumptions realistic ? Give reasons for your answer.
Business Firm Study Material
Ans.
PROFIT MAXIMISATION IS NOT ALWAYS THE AIM (OBJECTIVE) OF A BUSINESS FIRM
A traditional approach regarding objectives of a business firm is that the only object of a business firm is to earn maximum profits. Every business firm, whatsoever may be the form of its organisation or whatsoever may be its size, has a prime object of earning maximum profits. All the plans, policies and programmes of all the business firms are directed towards the attainment of this object. This view of Classical Economists is correct to some extent because a business firm is a firm which is established to carry on a business with an object of earning profits. So, the fact that a business firm has an object of earning maximum profits cannot be absolutely denied. Economic, social and political philosophy has undergone some important changes over recent years. Due to these changes, a business firm cannot have maximisation of profits as its only object. It has to serve many other purposes also such as-to provide maximum satisfaction to the employees, to provide maximum satisfaction to the consumers, to face the competition successfully, to follow the Government policies and regulations, to win the faith and confidence of consumers, to attain leadership in the industry, to avoid business risks, to assure liquidity of the firm, to minimise the possibilities of industrial disputes and to establish social justice etc. The objects of a business firm other than maximisation of profits are as follows:
1 To provide Maximum Satisfaction to the Employees. A business firm has to provide maximum satisfaction to its employees so that they may contribute their best efforts for the attainment of organisationl objectives. For this purpose, maximum facilities are provided to the employees so that they may feel happy and satisfied. It reduces the possibilities of labour turnover absenteeism. This object of a business firm is very important because employees are an essential part of an organisation and the success of an organisation depends upon the co-operation of employees.
2. To Provide Maximum Satisfaction to the Consumers. all the activities of a business firm are directed in the direction of providing maximum satisfaction to the consumers. A firm can be successful in achieving the object of earning profit only when the consumers have faith in the activities of the firm. For this purpose, good quality of products is maintained and effective after-sales-services are provided. In addition to this, heavy amount is spent on advertising also.
3. To Face the Competition Successfully. It is the time of throat-cut competition. No business firm can be successful in achieving its objects if it is unable in facing the competition successfully. So, all the possible measures should be adopted to face the competition.
4. To Follow Government Policies and Regulations. Government interferes in all the business activities of country. Government takes several measures to provide maximum social welfare. For this purpose, many direct and indirect restrictions are imposed upon business firms. These restrictions should be properly followed by all the business firms. Margin of profit should also be restricted to discourage the possibility of nationalisation.
5. To Win the Faith and Goodwill of Consumers. Development of Management has changed the view of Managers. They have come to realise that they cannot be successful in achieveing the objects of their firm if they are unable in winning the faith and goodwill of consumers. The faith and Goodwill of consumers can be won only when the goods and services of best quality are provided to them at fair price. Therefore, it becomes necessary for a firm to serve the consumers in the best possible manner.
6. To Attain Leadership in the Industry. Some business firms want to attain the leadership in their industry. They want to dominate the market. For this purpose, it becomes necessary for them that they should sacrifice the object of profit maximisation and provide goods and services of better quality at comparatively lower prices so that the demand of goods and servies of such firms may be more than that of other firms of the industry.
7. To Avoid Business Risks. Every business firm has to work under certain economic uncertainties. There are risks at every step. This fact makes the function of planning and decision-making more complicated. Management of the firm tries to avoid risks. For this reasons also, the firm has to be satisfied with restricted profits in place of maximum profits.
8. To Discourage Industiral Disputes. If the object of a business firm is to earn maximum profits, employees of such firm also demand increase in their remuneration. If this demand is not met, they go on strikes. Sometimes this problem becomes very serious. If this demand is met, cost of production of the firm will increase and the object of earning maximum profits is forfeited. Therefore, it is advisable that object of firm should be restricted profits in place of maximum profits.
9. To Assure Liquidity of Firm. Financial soundness is also very important object of a business firm. More and more financial resources are necessary for firm so that the firm may avail the opportunities of entering into new areas where the possibilities of making higher profits exist. It can be possible only when the firm is financially sound. Therefore, the firm should prefer to assure the liquidity in place of earning maximum profits.
10. To Establish Social Justice. Profit maximisation cannot be the only object of a business firm, becuase it has to carry on its economic activities in society. There are certain social obligations and responsibilities that should be honoured by a firm. These obligations and responsibilities put service before profit. With this purpose, a business firm should provide quality of goods and services to the society at most reasonable price and feel satisfied with marginal profits only.
Above discussion makes it clear that profit maximisation can never be only object of a firm. There are other objects also which are more important than this object. The reality is that the object of profit maximisation can also be served if these other objects are serged. However, minimum reasonable profits should always be earned by a business firm. According to Peter E. Druker, Profit serves three purposes as follows:
1 It measures the effectiveness and soundness of business efforts. It is the ultimate test of business performance.
2. It is the ‘risk premium’ that covers the cost of staying in business replacement, obsolescence, market risk and uncertainty.
3. Finally, Profit ensures the supply of future capital for innovation and expansion These three functions of profit stress the need for a minimum profit needed for survival and prosperity of enterprises.
