2. WHAT IS A FIRM?
• Firm is a business organization
• That buys or hires factors of production
• To produce goods and services
• That can be sold at a profit.
• Example:- Partnerships, private companies, state owned firms, multi-national firms etc.
4. 1. PROFIT MAXIMISATION
• BUSINESS IF FOR PROFIT. Firm adopts mark up pricing.
• Objectives of business is to generate largest amount of profit.
• Plays crucial role in the production decision taken by the firm.
• Efficiency of firm is measured in terms of profit generating capacity.
• PROFIT= TOTAL REVENUE – TOTAL COST
5. 2.SALES MAXIMISATION
• According to BAUMOL’S theory:-
• ultimate objective of firm is sales maximization rather than profit.
• sales volumes, and not profit determine market leadership in competition. Firm adopts
competitive pricing.
• Relates managers to maximizing sales.
• Sales volumes are better indicators of firms position in market( e.g.. Monopoly)
6. GROWTH RATE MAXIMISATION
• MARRIS proposed that:-
Owners aim at
profits and market
share
Managers aim at
better salary, job
security and growth.
Growth rate of firm
(G)
Growth rate for firms
product
(Gd)
Growth rate of capital
supply to firm
(Gc)
7. • Firms face two constraints:_
Managerial constraint Financial constraint
Marris stressed on importance of
human resources .
Skills, expertise, efficiency and
sincerity of managers are vital to
growth of firm.
Relates to prudence needed in
managing financial management.
3 ratios(set the limit for the growth)
8. COMPETITIVE PRICING
• Used mainly when product is homogenous .
• Highly competitive market.
• company tries to maintain its price more or less at par with its competitors price.
Competition based
pricing
10. PENETRATION PRICING
PROS CONS
Setting low prices can be marketing tool
raising brand awareness.
A quick way to gain market share
Entry to competitive industry
Enables a firm to benefit from economies
of sale
Overtime, prices can increase and firm
becomes more profitable.
Selling at loss for few months
Risky-if consumers have brand loyalty
may not switch despite if low prices
Might start a price war with existing
firms cutting prices to discourage entry
12. ENTRY DETERRING PRICING
• The price is kept low, thus making the market unattractive for other players.
• If prevailing price is low, entrants with high fixed cost will not be able to enter the market at
a price lower than this price.
• Small players may not survive due to higher average cost( LIMIT PRICING)
• FIRM EARNS ECONOMIES OF SALE.
• EXAMPLE:-electricity rates in public sector units in INDIA.
13. GOING RATE PRICING
• Prevailing market price is preferred.
• Price is fixed by dominant firm.
( follow the leader)
• Why?
• To avoid price war.
• Close substitutes( high cross elasticity)
• Adopted at maturity stage of product.
