Alternative Theories of the Firm

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The traditional neo-classical theory of the firm assumes that firms are profit maximisers. But this theory has been criticised for being unrealistic and this is because
a) not all firms are able to maximise profits eg.not perfect knowledge of market, firms are unlikely to know their demand curves (thus MR).

The biggest problem is estimating the actions and reactions of other firms in the market makes building a traditional theory of an oligopoly difficult. However, an oligopoly is known for it's interdependence and uncertain characteristics. Mutual interdependence occurs because each firm holds a large market share so their movement will affect strongly other shares. This creates uncertainty because the behaviour of one firm is influenced by expectations and actions of what other firms do. 
  b) firms have aims other than profit maximisation, a divorce of ownership from control means managers (rather than owners or shareholders) may have the most control when running a firm, this is called managerial capitilism. This relatively new idea replaced entrepreneurial capitilism where the owner benefits directly from profit made. So if managers only have a small financial interest in the firm, will they be motivated by aims other than profit maximisation?


1) Managerial Self Interest- the idea that managers wish to pursue aims which give them the most satisfaction. 

) Salary- large salaries means higher standard of living and implies greater status.

) Status- number of staff under person's control is a symbol of person's professional importance.  

) Power over new investment- refers to 'Pet Projects', not essential for firm's survival but enable manager to fund own interests, shows power over resources.

) Fringe Benefits- the greater level of 'perks' the more dominant…




A brief revision note on objectives of the firm. The test yourself facility allows the student to test themselves, might provide some distraction from reading and may point out learning needs.

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