1.

Business Firms
These exist for making

2. Non Business Firms

These are Non Profit

Organizations
Eg.- Universities,

profits. Civil Hospitals, Foundations, N.G.Os, etc

Firm as an indivisual entity takes decision like

What to produce ? How to produce ? When / Where to produce ? How much to produce ?

Whom to sell ?
At what price !!!!!!!!!!!

 It is group of firms engaged in the production of a specific

commodity.
It is spread over a wide region. Grouping all the firms acc to the most prominent characteristics

that they have in common constitutes an industry.

 According to the traditional theories,

Maximization of Profits & 2. Wealth Maximization is the sole objective of a firm.

1.

This has been the most important assumption on which economists have built price and production theories.

 This is the Theory of the Firm. A firm strives towards this goal rationally & has complete

information about the product, factors, market demand, supply and prices.
Profit is understood as the excess of firms Total Revenue of sales

proceeds of a given output over its Cost of Production.

Presented as -

P = T.R T.C Profit = Total Revenue Total Cost

WILLIAMSONS HYPOTHESIS OF MAXIMIZATION OF MANAGERIAL UTILITY FUNCTION

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Statement
Assumptions of the Model Framework of the Model Drawbacks
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In Williamsons Model, Managers are free to

pursue their own self-interest once they have achieved a level of profit that will pay satisfactory dividends to the shareholders and still ensure growth

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 Market is non-perfectly competitive

Owners & Managers of the firm are divorced from

each other
A minimum profit constraint is imposed on the

managers by the capital market

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UTILITY FUNCTION

A set of factors which give rise to managerial satisfaction. Utility is taken to arises from certain aspects of management tasks like Responsibility Status Prestige Dominance Professional Excellence Security Salary, etc.

Pecuniary & Non-Pecuniary Variables

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Expense Preference
The satisfaction which managers derive from certain types of expenditures.

3 Variables:
Additional Expenditure on Staff ( S ) Managerial Emoluments ( M ) Discretionary Investments ( ID )
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The Managers Utility Function Is

U = f( S, M, ID)

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 Underestimates the profit-maximizing behavior of the

managers in real world

The theory holds good only when rivalry (Competition)

between firms is weak

The Model Fails to deal with the problem of oligopolistic

interdependence.
The model does not apply in a dynamic setup like changing

demand and cost conditions during booms and recessions.