Maximizing Profits as the Main Goal Essay -- Economics Business Manage

Maximizing Profits as the Main GoalThe traditional theory (neoclassical) assumes that firms primary heading is to maximize profits. That is if the firm is ownercontrolled. This assumption is based on that firms makes the outputand price decisions. Also, that firm takes all necessary actions toearn the greatest profit possible. The managerial theory assumes firmsdo not necessarily act in order to maximize profits. The basic tenetbehind this is the separation of ownership from focussing, complexityof the validation and the firms manager maximizes his own utilityand growth rather than profits. The reason for this is that managersmay be judged by the level of sales tax income. I leave be providingsupporting arguments for and against this assumption that the firmsmain motivation is to maximise profits and draw a conclusion byanalysing the firms behaviour as well as further discussing thetheories of firms.Profit maximising assumption is based on both premises, firstly thatowner is in control of day-to-day management of the firm and secondlythat the main desire of owners is to make a higher profit then theamount they invested in the firm. Since this assumption is based ontwo assumptions, therefore if these two premises dont hold is itunderstandable to believe that firms goals is not to maximize profits.Well, this will depend on the motivation of singular firms.If a firms ownership and control be in the hands of a single personor small groups of people, then its reasonable to assume that thefirms owners goal is to maximize profits. But most of todays firmsare owned by shareholders and other giant cooperation, but day-to-daycontrol of the firm is under management. Therefore, the objectives ofmanagements may differ from the shareholders and conflicts may arise.For example Baumal (1959) suggest that the manager-controlled firm islikely to have sales revenue maximization, as its main goal thanprofit maximization favoured by shareholders (Applied political economy 7thed. p54). Also, studies of 177 firms between 1985 and 1990 by Conyonand Gregg (1994) found that the pay of top executive of man-sized firms inUK was mostly related to sales growth.Other studies have found that profit was the most importantdeterminant of executive income. For example A work by ManagementToday in 1990 asse... ..., argued that regardless of how actual firms may behave and constraints on rationality they may be subject to, the survivingfirms are those who attained high profits. Due to the strength ofthese arguments, we tend to accept profits maximization theories arejustifiable.BibliographyAlchian, A (1950), Uncertaintity. Evolution, and Economic Theory,Journal Of Political Economy. 58(3), 211-221.Buzzel, R, & Gale, B. (1987). The PIMPS Priciples, strategical PlanningInsitute.Conyon, M & Gregg, P. (1994). Pay at the top a study of thesensitivity of top director remuneration to company specific shocks,National appoint Economic Review, August.Friedman, Milton (195 3), Essay in Positive Economics, Chicago ChicagoUniversity Press.Griffith, Alan & Wall, Stuart (1997). Applied Economics AnIntroductory Course. 7th Ed.Lipsey & Chrystal (1999). Priciples of Economics. 9th Ed.Marris, R. (1964) The Economic Theory of Managerial Italism,Macmillan.Sloman, J (2003).Economics. Prentice Hall. 5th edWilliam, K. Objectives. Can be found onhttp//william-king.www.drexel.edu/top/prin/txt/MPch/firm2.html.Accessed 4th of February 2005.