Managerial Economics

Management are responsible for making decisions within firms and these decisions often involve risk and uncertainty. Models have been developed, all of which are based upon the objective of firms, to help identify the decision which must be made in order to achieve the desired outcome (Moschandreas, 2000). The neoclassical model states the firm’s main objective is profit maximisation. However, economists believe it is unrealistic to assume firm’s aim for maximum profits in this modern economy for reasons discussed later. The managerial school offers alternative models in substitute of the neoclassical model which assumes profit maximisation. This essay will examine Baumol’s revenue maximising model and Williamson’s managerial utility model in further detail. Marris’s model of managerial enterprise will also be examined as it helps us to understand in more detail why shareholders may complain about their firm growing too fast.

The Neoclassical Model

The neoclassical model states the main objective of a firm is profit maximisation; output is set at a level where marginal revenue equals marginal cost as shown in figure 1. This model can be used to predict how a firm will respond to changes in its environment. It assumes the firm produces a single, standardized product and assumes perfect certainty and knowledge regarding present and future costs as well as demand conditions. More importantly it assumes the firm is owned and managed by a single individual or few individuals meaning there is no conflict of interest between principle and agent and profit maximisation is the sole objective of the firm (Petrochilos, 2009).

The neoclassical model does not consider over which period profits are to be maximised. Therefore it assumes firms...

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... sacrificed for growth which may lead to a takeover or selling of their shares.

Works Cited

Boukouras, A., n.d. Lecture Notes. s.l.:s.n.

Davies, H. & Lam, P.-L., 2001. Managerial Economics: An Analysis of Business Issues. s.l.:s.n.

Hall, R. & Hitch, C., n.d. Price Theory and Business Behaviour. s.l.:Oxford University Press.

Marris, R., 1963. A Model of the "Managerial" Enterprise. s.l.:s.n.

Moschandreas, M., 2000. Business Economics Second Edition. s.l.:Thomson Learning.

Petrochilos, G., 2009. Managerial Economics 4th Edition. s.l.:Pearson.

Reekie, W. D. & Crook, J. N., 1995. Managerial Economics A European Text. s.l.:Prentice Hall.

Townsend, H., 1995. Foundations of Business Economics: Markets and Prices. New York and London: Routledge.

Lila J. Truett & Dale B. Truett (1992). Managerial Economics 4th edition Analysis Problems Cases. South-Western publishing co.