Theories of The Firm

Different firms belonging to same industry, facing the same market environment behave differently.

Thus there is a need for theories of the firm.

The theory of firm assumes that the firm seeks to maximize profits and minimize cost and on the basis of that it predicts how much of a particular commodity the firm should produce under different forms of market structure or organization.

Combines and organizes resources for the purpose of producing goods and/or services for sale.

Internalizes transactions, reducing transactions costs

Primary goal is to maximize the wealth or value of the firm

Objectives

1)   Profit Maximization

2)   Sales Maximization

3)   Increasing Market shares

4)   Building a good business reputation

5)   Financial stability and liquidity

6)   Maintenance of good labour relations

7)   Job satisfaction

8)   Leisure and peace of mind.

Traditional Theory of the Firm

The classical theory of the firm relied heavily on the notion that firms are small, owner-managed organizations, such as proprietorships, operating in highly competitive markets whose demand functions are given and where only normal profits can be earned.

If the firm did not therefore maximize profits it would fail to survive under these conditions.

There are two main objections to this notion

The model of a profit-maximizing firm is an owner-managed firm producing only one good, which knows all future cost and revenue streams with certainty.

Such a  firm could indeed choose the levels of output and price that would maximize its profits.

But, in fact, firms are faced with much more complex decisions, to be taken in a dynamic and  uncertain environment, and in this case it is far less clear how a profit-maximizing firm will behave.

Firms may be aiming to do something completely different; for example to maximize sales or growth.

Such an objection may well apply to modern joint-stock companies or to any other company that is not managed by its owners.

Economis of Scale

Anything which serves to minimize average cost of production in the long run as the scale of output  increases is referred  to as “ economies of scale “ It is measured in terms of  money.

The low cost of production is a result of what is called “economic of scale”.

Economics of Scale is a term that is used to describe the reduction in cost-per-unit as more units are produced. For example, if a company makes 500 widgets, they cost the company 10 cents a piece to produce. Another company makes 100,000 widgets, and can therefore purchase the materials necessary to make them for much cheaper than its competitors, so each widget only costs this company 5 cents a piece to produce.

He increase in efficiency of production as the number of goods being produced increases. Typically, a company that achieves economies of scale lowers the average cost per unit through increased production since fixed costs are shared over an increased number of goods. 

When a firm expands in size by increasing the scale of its output, certain cost advantages accrue to the firm those are called “internal economies”.

Economics Of Scale

1)   Old style technology

2)   Standardization

3)   Cost advantage from volume

4)   Separable variable costs

5)   Task specialization

6)   Work as a social activity

7)   Expensive flexibility

8)   Large plant

Dis Economics of Scale

An economic concept referring to a situation in which economies of scale no longer function for a firm. Rather than experiencing continued decreasing costs per increase in output, firms see an increase in marginal cost when output is increased.

Classification

Internal economies

Those economics which are opened to an individual firm when its size expands, they emerge with in the firm itself as its scale of production .

Forms of internal economies

1)   labour economies

2)   technical  economies

3)   managerial economies

4)   marketing economies

5)   financial economies

6)   risk minimizing economies

External economies

The result of the growth and expansion of any particular industry or a group of industry  as a whole . Thus, external economies are the function of the size of industry when its size expand

Thus, external economic can never be monopolized by any one firm in an industry,

Production Function

The tool of analysis used to the input output relationship implied in the theory of production is known as production function.

 

It signifies a functional relationship between physical inputs (Factor of Production)  and physical output (Quantity of goods produced). It expense a flow of input which result in a flow of output during a specific period of time. When technology advanced or improve, the production function also changes leading to large output.

Inputs – the factors of production classified as

Land – all natural resources of the earth – not just ‘terra firma’!

Price paid to acquire land = Rent

Labour – all physical and mental human effort involved in production

Price paid to labour = Wages

Capital – buildings, machinery and equipment not used for its own sake but for the contribution it makes to production

Price paid for capital = Interest

Process

Product or service Generated value added

Output

Production of good.

Writing Communication

“Reading makes a full man, Conference a ready man, writing an exact man”

-Francis Bacon

Pre-Writing

        1. Planning

        2. Collection of Information

Free-Writing

        1.Feel at ease

        2.Gather mental strength

        3. Re- writing

“For writing well in any language one should speak as the common people do and think as wise men do” - Aristotle

Principles of Business Writing

Unity - Written messages should contain unified sentences &

Emphasis - Ideas, facts, Figures, graphs, tables to be arranged in the order of importance and at proper places

Completeness - Should Contain relevant facts

Clarity - Message free from ambiguity and confusion

Conciseness - Possible Convey the message in fewest words

Accuracy

1)   Check facts, figures and words

2)   Correctness of words

3)   Technical accuracy of language

4)   Concord- Rule of the agreement between words in gender, number and person

5)   Unnecessary shift in tenses

6)   Prepositions

7)   Punctuation

Language & Tone

Use Standard English

Tone

Levels of formality

1)   Informal Tone Colloquialism & Slang Formal Tone

2)   Use Natural language

3)   You attitude ( reader’s emphasis)

Report Writing

A report is a logical presentation of facts and information. The report information is needed for reviewing and evaluation progress, for future planning course of action and for taking decisions.

Report provides a feedback to the managers on various aspects of the organization

Every organization has a system of routine periodical reporting on the progress and the status of different activities.

Types

Reports may be routine or special.

Routine reports are periodical and are usually prepared by filling in printed forms to convey information about the progress or status of work.

Special reports are required when a special situation or problem arises.

1)   Routine

2)   Special

Routine Reports

Routine reports are usually forms in which blanks have to be filled in or multiple choice statements are to be ticked.

This is filled carefully to ensure that the management gets complete information.

the following are routine reports

1)   Progress report

2)   Inspection report

3)   Performance appraisal report

4)   Periodical report

Special Reports

Special reports may be written by an individual or by a group of persons to whom the task has been assigned. The report is submitted to the authority that has assigned it.

1)   F.I.R

2)   Investigation report

3)   Survey report

4)    Project report.

Information

Objectives

1)   To improve and impress the representation of an entity

2)   To update the level of knowledge

3)   To get a surprise value

4)   To reduce uncertainty

5)   To aid decision making

Characteristics

1)   Relevance

2)   Quality

3)   Timeliness

4)   Completeness

5)   Source

6)   Scope

7)   Accuracy

8)   Element of surprise

9)   consistency

10)       Reliability

11)       Impartibility

12)       Timeframe

13)       Frequency

14)       Reduces uncertainty

15)       Form of presentation

16)       Complete

Classification

1)   Action information

2)   No-action information

3)   Recurring information

4)   Non-recurring information

5)   Internal information

6)   External information

7)   Planning information

8)   Control information

9)   Knowledge information

Methods

1)   Observation

2)   Experiment

3)   Survey

4)   Subjective estimation

5)   Transaction processing

6)   Purchased from outside

7)   Publications

8)   Government agencies