Introduction Value maximization theory was developed as an alternative to the profit maximization theory due to weaknesses or limitations of profit maximization theory. This theory is also known as wealth maximization theory. According to this theory, value or wealth maximization is the long-run objective of the firm that guides resource allocation decisions of the firm …
Herbert Alexander Simon one of the pioneers of behavioral theory dissatisfied with the profit-maximizing model and gave his own model in 1955 and called Simon’s Theory of Satisficing. Therefore, his theory was satisfying behavioral theory. He said that instead of maximizing profits, the business firms aim at merely satisficing. It means as per him, producers …
Introduction William J. Baumol confronted the assumption of profit maximization and argued that maximization of sales rather than profit is the ultimate objective of the firm. So, a firm should direct its energies on promoting and maximizing sales. He, therefore, called his hypothesis as Sales Revenue Maximization hypothesis. The sales maximization model is thus an alternative …
Sales Revenue Maximization Model/Baumol’s Model to Theory of the Firm Read More »
Profit maximization is one of the most important assumptions of economic theory. In economics, it is always assumed that a firm’s rationality is the maximization of profit. It means, rational producer or entrepreneur always attempts for profit maximization. Thus profit maximization constitutes a central and crucial concept in the theory of the firm.
The term profit in economics differs from that generally used by the business community. A business profit is an accounting profit or accounting concept of profit and presents the residual sales revenue to the owners of the business firms after making payments to all purchased factors or resources used by the firm belonging to other persons.
The business organization produces goods not for the charity rather for generating profits. In a dynamic and free-market economy, profit is only the major stimulating factor for new innovation and new products. The rate of profit in the economy gives a signal to producers to change their rate of output or to leave or to join the industry.
Managerial economics combines economic theories with decision science tools and as it is metrical and analytical it assists the managers to solve the complexity existed in the business. Managerial economics through its skills and techniques always ensure the solution to business decision-making problems that may be faced by every type of business organization. Managerial economics plays a key role in the business decision-making process.
Managerial economics is developed from micro economic theories by taking those concepts and techniques that help managers to select strategic decisions/direction, efficiently allocate the available resources, and to respond effectively to strategic issues. Therefore, it is an application of economic theory into business practice/management.
The scope of business economics is very wide and it is increasing day by day. The scope of managerial economics may deal with demand analysis and forecasting, production analysis, cost analysis, inventory management, advertising, pricing system, resource allocation, and so on.
Business economics/managerial economics is the application of economics in the field of business management. It means it is the use of economic theory and methods to decision-making problems that a firm may have to face. Managerial economics has been a separate science from traditional economics since the 1950s. After such, economists treat managerial economics as a young and growing science.