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Theory of the firm
The document discusses the theory of the firm, which assumes that firms rationally aim to maximize profits subject to technical and market constraints. It states that a firm transforms inputs into higher-value outputs using technology. The firm strives to achieve its sole goal of profit maximization in both the short and long run, with short run allowing for partial adjustments and long run allowing for complete adjustments to changing conditions. The firm prefers alternatives that help consistently achieve profits and acts rationally with perfect knowledge to pursue this goal.
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Theory of the firm
- 2. The theoryof the firm has been developed on the basis of the assumption that rational firm will have the objective of profit maximisation, subject to the technical & market constraints.
- 3. 1. Firm isa unit which transforms valued inputs into outputs of a higher value using the given state of technology. 2. The primary concern of this model is to analyze changes in the prices & quantities of inputs & outputs. 3. The firm strives towards the achievement of its goal-profit maximisation. 4. The market conditions (like competition, monopoly) for a firm to operate are given. 5. While choosing between alternatives, the firm prefers the alternative which help it to consistently achieve profit.
- 4. 1. The firmhas a single goal- to maximise profit. 2. The firm acts rationally to pursue its goal. Rationally implies prefect knowledge of all relevant variables at the time of decision making. 3. The firm is single ownership one.
- 5. Short Run ◦Short run is defined as a period where adjustments to changed conditions are partial. Long Run ◦ Long run is defined as a period where adjustments to changed circumstances is complete.
- 6. Assumption ofindependence of periods ◦ Short run period has no effect which link this period to next period. Assumption of period-linkages ◦ Each short run period is linked to the next period.
- 7. Condition 1- Marginal revenue (MR)= Marginal Cost (MC). ð(TR) = ð(TC) ðX ðX Condition 2 This implies that the slope of MR curve is less than the slope of MC curve. ð²(TR) < ð²(TC) ðX² ðX²
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