1. Theories of the Firm
By,
Satish Kumar M
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2. Definition of 'Theory of the Firm'
A microeconomic concept founded in neoclassical
economics that states that firms exist and make
decisions in order to maximize profits.
Businesses interact with the market to determine
pricing and demand and then allocate resources
according to models that look to maximize net
profits.
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3. Necessity of Theories:
Different firms belonging to the same
industry, facing the same market
environment, behave differently, Thus, the
necessity for theories of the firm
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4. Validity of the Theories:
The Validity of the Theories is judged on the basis
of several criteria
•Consistency
•Realism of its assumptions
•Generality
•Application
•Simplicity
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5. Purpose of the Theories:
The Validity of the Theories is judged on the basis
of several criteria
•To provide models for the analysis of the decision
making in the firm in various market structures
•To provide explanation on the entire range of
price-output decisions-how the firms set their
price, decide their product line, advertisement
expenses, sales promotion efforts, research &
development expenses, etc……
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6. Criticisms:
•Emergence of Oligopoly
•Separation of ownership from management
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7. Thank You
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