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Standard Theory of the Firm

On June 15th, 2012, Posted by Author No Comments

What is the Standard Theory of the Firm?

The Standard Theory of the Firm belongs to the neoclassical economics. The Standard Theory of the Firm holds that firms exist and the goal of the firm is profit maximisation. The firms examine the market to determine the price of their products and the demand in the market for the goods they produce. Then they assign the resources on this basis in order to obtain the maximum profits.

Thus the Theory of the Firm can give an insight of the firm with regards to the inputs it uses, the techniques and processes it employs in the production, the quantity of the goods produced and the prices that the firm charges for these products.

Standard Theory of the Firm is an important subject for a future manager and decision maker and also one of the coursework writing topics set for Marketing and Management students. Here is a short sample of the topic. If you need a full assignment writing on this or other topics, our coursework help is ready to prepare papers suited to your specifications. Approach our assignment help for all your writing needs at our website.

What are the main features of the Standard Theory of the Firm?

The Standard Theory of the Firm proposes that businesses produce goods up to the state where marginal cost matches marginal revenue and utilise the production dynamics to the state where the marginal revenue product is comparable to the costs that accrue in making utilising them. The Standard Theory of the Firm extends in conjunction with the Theory of the Consumer, which maintains that buyers strive to maximize their overall function. Modern interpretations of the Standard Theory of the Firm sometimes make a distinction between long-term incentives such as sustainability and short-term drives such as profit maximization.

What are the limitations of the Standard Theory of the Firm?

Although all economists agree that the ultimate goal of the firm is profit maximisation, critics of the Standard Theory of the Firm point out that the firm is not a singular entity but is composed of various individuals and groups. As such, the goals of these varied individuals and groups, also known as coalitions, need not be the same. These goals may not be for profit and may not necessarily be for the maximisation of profit and instead may seek only for sufficient profit.

Another problem with the Standard Theory of the Firm is that there is an assumption that the information of the firm is perfect, the basis on which it makes the decisions. But because the information has to be obtained from other sources or individuals, the information may be inadequate, incomplete or even biased according to the perspective and motives of the sources. Hence, the firm has to search for the information and once obtained, has to make the choices or decisions.

What are the modern interpretations of the Standard Theory of the Firm?

The modern interpretations of the Standard Theory of the Firm take other factors also into account: the decision makers or managers usually own very low equity in the firm and this may affect their decisions; and the Chief Executive Officers of the large public sector business are not only aiming for profit maximisation but also looking to reaching their goals in maximising sales, improving public relations and enhancing the market share of the firm.

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