What is the basic objectives of a firm?Conventional theory of firm assumes profit maximization is the sole objective of bu...
Long run survival & market share: according to some economist, the primary goal of the firm is long run survival.Some othe...
What is the difference between an industry and a sector?The terms industry and sector are often used interchangeably to de...
. The many changes in the market demand , new opportunities due to worldwide marketing , global sourcing ofmaterials and n...
• Investments must be financed in some way – however there are always financing alternatives that can be considered.For ex...
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Business economics


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Business economics

  1. 1. What is the basic objectives of a firm?Conventional theory of firm assumes profit maximization is the sole objective of business firms. But recent researcheson this issue reveal that the objectives the firms pursue are more than one. Some important objectives, other than profitmaximization are:(a) Maximization of the sales revenue(b) Maximization of firm’s growth rate(c) Maximization of Managers utility function(d) Making satisfactory rate of Profit(e) Long run Survival of the firm(f) Entry-prevention and risk-avoidanceProfit Business Objectives:Profit means different things to different people. To an accountant “Profit” means the excess of revenue over all paidout costs including both manufacturing and overhead expenses. For all practical purpose, profit or business incomemeans profit in accounting sense plus non-allowable expenses.Economist’s concept of profit is of “Pure Profit” called ‘economic profit’ or “Just profit”. Pure profit is a return overand above opportunity cost, i. e. the income that a businessman might expect from the second best alternatives use ofhis resources.Sales Revenue Maximisation: The reason behind sales revenue maximisation objectives is the Dichotomy betweenownership & management in large business corporations. This Dichotomy gives managers an opportunity to set theirgoal other than profits maximisation goal, which most-owner businessman pursue. Given the opportunity, managerschoose to maximize their own utility function. The most plausible factor in manager’s utility functions is maximisationof the sales revenue.The factors, which explain the pursuance of this goal by the managers are following:. • First: Salary and others earnings of managers are more closely related to sales revenue than to profits • Second: Banks and financial corporations look at sales revenue while financing the corporation. • Third: Trend in sales revenue is a readily available indicator of the performance of the firm.Maximisation of Firms Growth rate: Managers maximize firm’s balance growth rate subject to managerial &financial constrains balance growth rate defined as:G = GD – GCWhere GD = Growth rate of demand of firm’s product & GC= growth rate of capital supply of capital to the firm.In simple words, A firm growth rate is balanced when demand for its product & supply of capital to the firm increase atthe same time.Maximisation of Managerial Utility function: The manager seek to maximize their own utility function subject to theminimum level of profit. Managers utility function is express as:U= f(S, M, ID)Where S = additional expenditure of the staffM= Managerial emolumentsID = Discretionary InvestmentsThe utility functions which manager seek to maximize include both quantifiable variables like salary and slackearnings; non- quantifiable variables such as prestige, power, status, Job security professional excellence etc.
  2. 2. Long run survival & market share: according to some economist, the primary goal of the firm is long run survival.Some other economists have suggested that attainment & retention of constant market share is an additional objectiveof the firm’s. the firm may seek to maximize theirprofit in the long run through it is not certain.Entry-prevention and risk-avoidance, yet another alternative objectives of the firms suggested by some economists is toprevent entry-prevention can be: 1. Profit maximisation in the long run 2. Securing a constant market share 3. Avoidance of risk caused by the unpredictable behavior of the new firmsPursuit of Personal WelfareThe people who make decisions for a business are, in fact, people. They have likes and dislikes. They have personalgoals and aspirations just like people who do not make decisions for firms. On occasion these people use the firm topursue their own personal welfare. When they do, their actions could enhance the firms profit maximization or, inmany cases, prevent profit maximization.Pursuit of Social WelfareThe people who make decisions for firms also have social consciences. Part of their likes and dislikes might be relatedto the overall state of society. As such, they might use the firm to pursue social welfare, which could enhance orprevent the firms profit maximization.Natural SelectionWhichever objective a firm pursues on a day-to-day basis, the notion of natural selection suggests that successful firmsintentionally or unintentionally maximize profit. That is, the firms best suited to the economic environment, and thusgenerate the most profit, are the ones that tend to survive.The natural selection of business firms is an adaptation of the biological process of natural selection, in whichbiological entities best suited to the natural environment are the ones that survive. The concept of economic naturalselection means that those firms that generate the greatest profit are the ones that avoid bankruptcy and survive toproduce another day.While firms might pursue sales maximization, personal welfare, or social welfare, only those firms that also maximizeprofit remain in business.DIFFERENCE BETWEEN A FIRM AND AN INDUSTRYAn industry is the name given to a certain type of manufacturing or retailing environment. For example, the retailindustry is the industry that involves everything from clothes to computers, anything in the shops that get sold to thepublic. The retail industry is very vast and has many sub divisions, such as electrical and cosmetics. More specialisedindustries deal with a specific thing. The steel industry is a more specialised industry, dealing with the making of steeland selling it on to buyers.The difference between this and a firm is that a firm is the company that operates within the industry to create theproduct. The firm might be a factory, or the chain of stores that sells the clothes, within its industry. For example, onefirm that makes steel might be Avida steel. They create the steel in that firm for the steel industry.A firm is usually a corporate company that controls a number of chains in the industry it is operating within. Forexample in retail, the firm Arcadia stores owns the clothing chains Topshop, Dorothy Perkins, Miss Selfridge, andEvans. These all operate for the firm Arcadia within the industry of retail.Several firms can operate in one industry to ensure that there is always competition to keep prices reasonable and stopthe market becoming a monopoly, which is where one firm is in charge of the whole industry. Sometimes, a firm is notnecessary within the industry and independent chains and retailers can enter straight into the market without a firmbehind them, although this is risky. This is because one of the advantages of having a firm behind you is that it is asafeguard against possible bankruptcy because the firm can support the chain that it owns.
  3. 3. What is the difference between an industry and a sector?The terms industry and sector are often used interchangeably to describe a group of companies that operate in the samesegment of the economy or share a similar business type. Although the terms are commonly used interchangeably, theydo, in fact, have slightly different meanings. This difference pertains to their scope; a sector refers to a large segment ofthe economy, while the term industry describes a much more specific group of companies or businesses.A sector is one of a few general segments in the economy within which a large group of companies canbe categorized. An economy can be broken down into about a dozen sectors, which can describe nearly all ofthe business activity in that economy. For example, the basic materials sector is the segment of the economy in whichcompanies deal in the business of exploration, processing and selling the basic materials such as gold, silver oraluminum which are used by other sectors of the economy.An industry, on the other hand, describes a much more specific grouping of companies with highly similar businessactivities. Essentially, industries are created by further breaking down sectors into more defined groupings. Each of thedozen or so sectors will have a varying number of industries, but it can be in the hundreds. For example, the financialsector can be broken down into industries such as asset management, life insurance and Northwest regional banks.The Northwest regional bank industry, which is part of the financial sector, will only contain companies thatoperate banks in the Northwestern states.When breaking down the economy, the first groups are sectors which describe a general economic activity. Then all ofthe companies that fall into that sector are categorized further into industries where they are grouped onlywith companies with which they share very similar business activities. This is not the end, however. Industries canbe further sub-categorized into various, more specific groupings.It should be noted that you may find situations in which these two terms are reversed. However, the general idearemains: one breaks the economy down into a few general segments while the other further categorizes those into morespecific business activities. In the stock market the generally accepted terminology cites a sector as a broadclassification and an industry as a more specific one.PRODUCTION MANAGEMENTProduction, however, is the act of making things; in particular the act of making products that will be traded or soldcommercially. Production decisions concentrate on what goods to produce, how to produce them, the costs ofproducing them, and optimizing the mix of resource inputs used in their production.Productivity and production management is the art of conducting and directing, through the application of frameworksand techniques, all aspects and operations of developing, creating, and innovating products.Productivity and production managements ultimate goal is the efficient consumption and allocation of resource inputsto maximize the quality and quantity of goods produced or services rendered.To improve productivity and production management, organizations should use forecasts on demand to preordainproduction plans. Through it, miscalculations could be sidestepped. Businesses that produce to order would be able tosupervise the backlog of unfilled orders, while those that produce to stock would be enabled to observe and control thelevel of inventory. Forecasting capabilities could be enhanced by way of incorporating excellent informationtechnology.Another way to improve productivity and production management is keeping managers vigilant of the factors thatconstitute problems regarding quality, cost and time in the production area. The most popular approaches are leanmanufacturing and workplace improvement. Both approaches encourage worker and management collaborationemanating mutual respect; and straightforward and transparent improvement methodologies.INVENTORY MANAGEMENTINVENTORY MANAGEMENT must tie together the following objectives ,to ensure that there is continuity betweenfunctions :• Company’s Strategic Goals• Sales Forecasting• Sales & Operations Planning• Production & Materials Requirement Planning.Inventory Management must be designed to meet the dictates of market place and support the company’s Strategic Plan
  4. 4. . The many changes in the market demand , new opportunities due to worldwide marketing , global sourcing ofmaterials and new manufacturing technology means many companies need to change their Inventory Managementapproach and change the process for Inventory Control .Inventory Management system provides information to efficiently manage the flow of materials , effectively utilizepeople and equipment , coordinate internal activities and communicate with customers . Inventory Management doesnot make decisions or manage operations, they provide the information to managers who make more accurate andtimely decisions to manage their operations.INVENTORY is defined as the blocked Working Capital of an organization in the form of materials . As this is theblocked Working Capital of organization, ideally it should be zero. But we are maintaining Inventory . This Inventoryis maintained to take care of fluctuations in demand and lead time. In some cases it is maintained to take care ofincreasing price tendency of commodities or rebate in bulk buying.FINANCIAL MANAGEMENTFinancial Management can be defined as:The management of the finances of a business / organisation in order to achieve financial objectivesTaking a commercial business as the most common organisational structure, the key objectives of financialmanagement would be to:• Create wealth for the business• Generate cash, andProvide an adequate return on investment bearing in mind the risks that the business is taking and the resourcesinvestedThere are three key elements to the process of financial management:(1) Financial PlanningManagement need to ensure that enough funding is available at the right time to meet the needs of the business. In theshort term, funding may be needed to invest in equipment and stocks, pay employees and fund sales made on credit.In the medium and long term, funding may be required for significant additions to the productive capacity of thebusiness or to make acquisitions.(2) Financial ControlFinancial control is a critically important activity to help the business ensure that the business is meeting its objectives.Financial control addresses questions such as:• Are assets being used efficiently?• Are the businesses assets secure?• Do management act in the best interest of shareholders and in accordance with business rules?(3) Financial Decision-makingThe key aspects of financial decision-making relate to investment, financing and dividends:
  5. 5. • Investments must be financed in some way – however there are always financing alternatives that can be considered.For example it is possible to raise finance from selling new shares, borrowing from banks or taking credit fromsuppliers• A key financing decision is whether profits earned by the business should be retained rather than distributed toshareholders via dividends. If dividends are too high, the business may be starved of funding to reinvest in growingrevenues and profits further.LABOUR MANAGEMENT RELATIONSHIPMutual Trust Between Labor and Management The basic concepts of mutual trust between labor and management are:improvements in the lives of employees are realized through the prosperity of the company, and labor and managementthus share the same goal of company prosperity as a common value; management will take into consideration to thegreatest possible extent stable employment and will continuously strive to improve working conditions; and employeeswill cooperate with the companys policies in order to promote the companys prosperity.LABOR-MANAGEMENT RELATIONSHIPThe term labour relations, also known as industrial relations, refers to the system in which employers, workers andtheir representatives and, directly or indirectly, the government interact to set the ground rules for the governance ofwork relationships. It also describes a field of study dedicated to examining such relationships. The field is anoutgrowth of the industrial revolution, whose excesses led to the emergence of trade unions to represent workers and tothe development of collective labour relations. A labour or industrial relations system reflects the interaction betweenthe main actors in it: the state, the employer (or employers or an employers’ association), trade unions and employees(who may participate or not in unions and other bodies affording workers’ representation). The phrases “labourrelations” and “industrial relations” are also used in connection with various forms of workers’ participation; they canalso encompass individual employment relationships between an employer and a worker under a written or impliedcontract of employment, although these are usually referred to as “employment relations”. There is considerablevariation in the use of the terms, partly reflecting the evolving nature of the field over time and place. There is generalagreement, however, that the field embraces collective bargaining, various forms of workers’ participation (such asworks councils and joint health and safety committees) and mechanisms for resolving collective and individualdisputes. The wide variety of labour relations systems throughout the world has meant that comparative studies andidentification of types are accompanied by caveats about the limitations of over-generalization and false analogies.Traditionally, four distinct types of workplace governance have been described: dictatorial, paternalistic, institutionaland worker-participative; this chapter examines primarily the latter two types.