OBJECTIVES

OF BUSINESS
MANAGERIAL
ECONOMICS
 OBJECTIVES OF BUSINESS
•An aim is where the business wants to go in the future, its goals. It
is a statement of purpose, e.g. we want to grow the business into
Europe.
•Business objectives are the stated, measurable targets of how to
achieve business aims. For instance, we want to achieve sales of
€10 million in European markets in 2020.
•A mission statement sets out the business vision and values that
enables employees, managers, customers and even suppliers to
understand the underlying basis for the actions of the business.
Amazon

Vision: “To be Earth’s most customer-centric company, where customers can find and
discover anything they might want to buy online.”
Mission: “We strive to offer our customers the lowest possible prices, the best available
selection, and the utmost convenience.”

Google

Vision: “To provide access to the world’s information in one click.”

Mission: “To organize the world’s information and make it universally accessible and
useful.”

Starbucks

vision statement: “to establish Starbucks as the premier purveyor of the finest coffee in the
world, while maintaining our uncompromising principles while we grow.”
Mission: “to inspire and nurture the human spirit — one person, one cup, and one
neighborhood at a time.”
 PROFIT AS BUSINESS OBJECTIVE
ACCOUNTING PROFIT VS. ECONOMIC PROFIT

ACCOUNTING PROFIT
•TR-(W+R+I+M)
•EXPLICIT OR BOOK COSTS

ECONOMIC PROFIT
INSURABLE RISKS
DEPRECIATON
PAYMENT TO SHARE HOLDERS
CONTRACTUAL COST
TRANSFER COST
ECONOMIC PROFIT = TR – (EXPLICIT COSTS + IMPLICIT COSTS)
POSITIVE OR NEGATIVE
 WALKER’S THEORY OF PROFIT

CLARK’S DYNAMIC THEORY OF PROFIT

HAWLEYS RISK THEORY OF PROFIT PROFIT

MAXIMIZATION-
THEORIES OF
KNIGHT’S THEORY OF PROFIT PROFIT

SCHUMPETER’S INNOVATION THEORY OF

PROFIT

MONOPOLY POWER AS A SOURCE OF PROFIT

 WALKER’S THEORY OF PROFIT

similarity between Assumed state of

rent and profit perfect competition

reward for the ability Rent Theory Presumed equal

of the entrepreneur
of Profit managerial abilities

marginal and super

Normal Profits
marginal entrepreneurs
 CLARK’S DYNAMIC THEORY OF PROFIT

Economy is Dynamic economy

dynamic not static makes pure profit

Normal profits in Dynamic Pure profit exists

static economy
Theory of only in the short run

Profit
Characteristics of Generic changes are
dynamic economy continuous
 HAWLEY'S RISK THEORY OF PROFIT

Reason for risks Profit:

Profit-Premium on Rent Theory 1. Compensation for

calculable risks
of Profit actuarial or loss

marginal and super 2. Inducement to

marginal entrepreneurs suffer consequences
 KNIGHT'S THEORY OF PROFIT

Difference between
Decision making
risk & Uncertainity

Calculable and non- Uncertainity

calculable risks
bearing

Area of uncertainity
 SCHUMPETER'S THEORY OF PROFIT

Economic Firms earn a normal

development profit.

New products

Innovation and Pure Innovation New technology

New sources of RM
profit
Theory New markets
Innovative management

Assumes a stationary Pricing

economy
 MONOPOLY POWER AS A SOURCE OF PROFIT

ECONOMIES OF SCALE SOLE OWNERSHIP OF LEGAL SANCTION AND MERGERS AND CONTROLS SUPPLY AND
RAW MATERIALS PROTECTION TAKEOVERS PRICE
 ​

BUSINESS PROCESS
INFOGRAPHIC COLLECTION

Modern
Baumol’s Hypothesis theory:maximization
of Sales Revenue of the value of the firm
Williamson’s Hypothesis
Maximisation of Maximisation of
Managerial Utility
dichotomy between
Marris’ Hypothesis of Function:
ownership and management Cyert-March
Maximisation of Firm’s
Manager’s utility function (U) is Hypothesis of
Growth Rate expressed as:
Satisfying Behaviour
The managers’ utility function U = f (S, M, ID)
firm’s behaviour is ‘Satisfying
(Um) and owners’ utility
Behaviour’
function (UD)
​
 ​

Helps in profit maximization

Decreasing business’ cost of goods

Increasing market share

Baumol’s Hypothesis of
Sales Revenue
Maximisation Increasing customer loyalty

Increasing brand image

Increasing efficiency

Improving employee engagement

​
 ​

owners and managers have their own utility functions to

Marris’ Hypothesis of maximise
Maximisation of Firm’s
Growth Rate Um = f (salary, power, job security, prestige, status),
Uo = f (output, capital, market-share, profit, public esteem).

Increasing markfails to deal satisfactorily with

oligopolistic interdependence.et share

G=GD=GC

managers have discretion to pursue objectives

Williamson’s Hypothesis other than profit maximisation
of Maximisation of
Managerial Utility Manager’s utility function (U) is expressed as:
Function
U = f (S, M, ID)

​
 ​

Satisfycing behaviour: they seek to achieve a ‘satisfactory

profit,’ a ‘satisfactory growth’, and so on. This behaviour of
firms is termed as ‘Satisfaction Behaviour’.

In order to reconcile the conflicting interests and goals,

managers have to satisfy all stakeholders

Cyert-March Hypothesis of
Satisfying Behaviour Criticism: cannot explain the firm’s behaviour under
dynamic conditions in the long run.

Cannot predict future course of action

Fails to explain interdependence

​
 ​

Distinction between principal and agent

Owners objective: Value of the firm

Managers objective: Maximise profits

Modern
theory:maximization of the Short-run V/s Long run
value of the firm

Present value=sum of expected future profits

in a certain time period with a discounted rate
of interest

Higher the profit ,higher the value of the firm