2. 1. Profit maximization
2. Sales revenue maximization
3. Williamson’s managerial utility model
4. Behavioural models
5. Corporate social responsibility

3. Traditional objective of owner-controlled
firms.
The “building block” of neoclassical
economics (not only for theory of firm but
also theories of price, and competitive
markets)
Assumption:
Firm produces and sells single product
Firms is managed by its owners. Where there is
divorce between ownership and control then the
managers still maximize profits on behalf of the
owners.

4. The rules of profit maximization: Firm should
produces at the output which maximize its
profit, which is output
Revenue – Cost =max
TR – TC = max
Revenue – cost = max
where:
Marginal revenue = marginal cost
MR = MC

6. Criticisms of profit maximization:
Based on the major assumption of neoclassical
economics: perfect information and rational
decision maker -> not happen in real world
Profit concept relates to time. The theory doesn’t
mention about long-run or short-run profit and
therefore could not explain the behavior of firm in
many cases
Doesn’t take into account the complexity of the
modern organization structure.
Empirical studies also shown that profit
maximization is not the single objective of firm
(only 26.1% of firms observed in 1981)

7. Defense of profit maximization:
Profit maximization remains an important
assumption in economic analysis partly because it
allows precise and predictive analysis of decisions
of firms
Empirical studies still show profit maximization
remains an importance objective of firms.

8. Reasons:
Sales revenue is a more useful short-term goal for
the firm than profit. Sales are measurable and can
be used as a specific target to motivate staff.
Increase in revenue will more than offset any
associated increases in costs -> Sales revenue
increase = profit increase
Increasing sales hence the size of the firm make it
easier to manage.

9. 1. How does the price – output combination
differ between a sales and profit-
maximizing firm?
2. How will managers react to the following
changes in costs if they are profit
maximizers, on the one hand, and sales
maximizers, on the other:
1. An increase in fixed costs?
2. An increase in variable costs?

10. Assumption of the model:
There are divorce between ownership and control
Senior management seeks to maximize its own
utility function rather than that of the owner.
Content:
Benefits related to management including
Salary :directly measurable in monetary terms
Non-pecuniary benefits: related to expenditures on:
Staff
Fringe benefits (free car, luxurious office, etc)
Discretionary investment
The satisfaction for management increase costs for
firm (directly and indirectly)

11. Comparison between Profit maximization & Utility:
Profit maximization model:
RP = AP = MP +DP
Managerial utility model:
RP = MP +DP – DE (with AP>MP)
whereas:
• MP: minimum profit
• AP: Actual profit
• RP: Reported profit
• DP: Discretionary profit
• DE: Discretionary expenditure

12. Discretionary
profit
Discretionary
expenditure
1
2
S1 S2

13. Assumption
Divorce between ownership and control
Internal structure of firm and the interaction
between groups could influence the firm’s
objectives.
Contents:
Analyze the process by which firms decide on their
objectives
Analyze the objectives setting, achieving and
adjusting

14. 2. Evaluate
performance
5. Aspiration level rises
Decision making process

15. There are groups/ department of conflict
interests
The above groups all have their influences to
the sets of objectives of the firm
The agreed objectives are satisfied to all
above groups.
Identify the objectives that need to be set,
those in turn will guide the decision making
process in individual department/ section

16. Some specific objectives
Production objective
Stock objective
Sales objective
Market share objective
Profit objective
Process to reach agreement:
Negotiate among groups by paying additional money
or more resources allocated to groups or individuals
to make them content with the objective chosen by
the firm.
Making side payment or policy commitments to keep
groups or individuals happy with any agreement.
Once objectives are agreed, decision will be made for
achieving objectives (such as price, advertising…)

17. Criticisms of the behavioural theory:
Only adopt a rather short-term vision of what the
firm is trying to achieve.
The theory does not explain the behaviour of firms
nor does it predict how actual firm react to changes
in the external environment.
The theory does not consider the behaviour of
other firms.

18. Divide into 6 different groups:
Owners/ Investors of the company
Finance department
Sales department
Marketing department
Inventory department
Production department
The company produces and sells table computers. As the economy
is going down and other reasons, sales revenue did not achieve
the target.
“Customers might want better PC with new technology where the
firm is not able to adopt”, according to sales
Inventory is full of “out-dated” stocks which according to sales are
obsolete.
Production department still insist on manufacturing rather than
cutting employees, saying that the current products are
marketable, just sales dept are not working hard enough
Owners of the company want to have normal profit as before, which
not been achieve d for the last 3 quarters.

19. Definition: the extent to which individual
firms serve social needs rather than those of
owners and managers, even if this conflicts
with the maximization of profits (Moir 2001)
The firm might:
Internalize social goals
Represent concerns of groups other than owners and
managers
Undertake voluntary action beyond that required by law
Recognize the social consequences of economic activity.

20. Examples of expenditures on social responsibility
might include:
Charitable giving.
Seconding staff to help with the management of community
projects.
Sponsorship of arts and sports, though at some point such
expenditure might be regarded as advertising.
And behaving in an environmentally responsible way by not
polluting rivers, etc.

21. Benefits for firm taking social responsibilities:
Long-run self-interest of the firm: socially responsible
behaviour generates additional revenue and profits in the
long run compared with firms that are less socially
responsible; this has been termed ‘‘winning by integrity’’.
Stakeholders: it is beneficial to the firm to keep in line with
ethical, social and cultural norms, because this keeps
workers, customers and suppliers happy and minimizes the
risks to the reputation and profitability of the firm.
Regulation: bad corporate behaviour may lead to the
imposition of an expensive and inflexible regulatory regime
to curb antisocial behaviour, while good corporate
behaviour may lead to the avoidance of government
regulation and be a more beneficial outcome for the firm

22. 1. Do you think “Bags of luck” likely to be an
owner-controlled or managerial-controlled
firm? Explain your reasons
2. Can you identify the objective (s) of Bags of
luck? Do you think all members of the firm
have the same set of objectives?
3. Provide 3 solutions to help resolve the
difficulties facing Bags of luck. Ranking the
importance of those solutions