Is ‘profit maximisation’ a satisfactory assumption when modelling the behaviour of firms? Why?
Economists have traditionally assumed that firms want to maximize profits. But do firms necessary want to maximize profit? When we attempt to establish what the objectives of firms might be, the distinction between managers and owners is crucial. This essay looks at the role of firms in the economy. Section one explains how firms are concerned to use inputs to make outputs and how managers analyse their choices in order to make profits. Section two talks about the role of the firm and its organisational structure whereas section three deals with profit maximisation theory. On section four and five is a contrast between long-run and short-run profit maximisation. Section six deals with relation between profitability and the growth of the business and the last section gives some conclusions about different alternative theories when we modelling the behaviour of firms.
Firms will normally wants to make as much profit as possible. By thinking to maximise profit, the firm could fulfil the human wants, which are defined as scarcity. Firms are concerned to use inputs to make outputs, which it means to spend money in order to make money because inputs cost money and outputs make money then the difference between them gave the profit. In order to stay in business firms will do what they can to avoid a decline in profit. But to achieve these objectives managers need to make choices. They need to decide out type of output to produce and at what price? What technology to use and what number and type of workers to employ? To be successful and at least not to decline the profit, firms need to analysis these factors into political, economic, social and technological (PEST), which will help to establish a strategy.
As it is stated on Economics for Business (Sloman, J and Sutcliffe, M, 2001) most production decision are not made by individuals who will consume...