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Theories of Firm_Managerial Economics

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Theories of Firm_Managerial Economics

  1. 1. Theories of the Firm By, Satish Kumar M Powerpoint Templates Page 1
  2. 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. Powerpoint Templates Page 2
  3. 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 Powerpoint Templates Page 3
  4. 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 Powerpoint Templates Page 4
  5. 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…… Powerpoint Templates Page 5
  6. 6. Criticisms: •Emergence of Oligopoly •Separation of ownership from management Powerpoint Templates Page 6
  7. 7. Thank You Powerpoint Templates Page 7

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