Managerial Economics_2

Objective of Firm & Industry

Firm is an individual company. Industry is the aggregate of firms.
There are 3 kinds of objectives in an organisation:

(i) Individual goal
(ii) Departmental goal
(iii) Organisational goal


Organisational goal include profit maximisation, sales maximisation, staff maximisation, utility maximisation and growth maximisation.
(A) Profit maximisation: Profit means business income is more than the business expenses. The difference between the income and expenditure (The income should be more).
In ordinary sense, Profit = Revenue - Cost.

There are 2 types of profit:
(a) Accounting profit and
(b) Economic profit

(a) Accounting Profit: is denoted as -

Profit = Total Revenue - Wages + Rent + Interest + M (cost of material)



(b) Economic Profit:
Economic profit is a profit that is above the opportunity cost. Opportunity cost is the income which is foregone which a businessman could expect from second best alternative. For example, if a businessman is using his own capital instead of borrowing from financial institution he has the opportunity to save the interest (which he has to pay if he has taken loan)

Knights theory of profit:

Knight has made a distinction between risk and uncertainity. He divided risk into 2 parts:
(a) calculable and (b) non calculable


(a) Calculable risks: are those risks whose probability of occurance can be estimated on the basis of available data. For example, fire in a godown.

(a) Non -calculable risks:
It is the area of uncertainity. Profit max. is the basic objective of a firm. Profit max. theory is a traditional theory. Marshal has defined the profit. According to him, the profit is divided into 2 parts:
(i) Normal profit and
(ii) Super normal profit

(i) Normal profit: It is a min. profit reqd. by an entrepreneur to stay in an industry.
(ii) Super normal profit: It is earned by the leader firm in the industry. Super normal profit can be defined as the difference between the total revenue & total cost (TR-TC).