● Business – All human activities which are related to the

production and distribution of goods and services for

satisfying human needs and wants for the profit motive.

● Economics- Economics is the study of how people

allocate scare resources for production, Distribution
and consumptions both individually and Collectively.

According to Lord Robins, “Economics is the science

which studies human behavior as a relationship between
ends and scarce means which have alternative uses”.
● It deals with the decision making and forward planning in
uncertainty and integrates economic theory with business
practice for the purpose of facilitating decision-making and
forward planning by management. It is a science that deals
with the application of various economic theories, principles,
concepts and techniques to business management in order to
solve business and management problems.

● According to Spencer and Siegelman “Managerial Economics is the

integration of economic theory with business practice for the purpose of
facilitating decision making and forward planning by management”.

● According to the James Bates and J.R. Perkinson “Managerial Economics

is a study of behavior of firms in theory and business practices”.
Thus, business economic meets these needs of the business firm. This is
illustrated in the following presentation

Economic Theory and Business Management

Methodology Decision problems

Managerial Economics
Applied of Economics to
solve Business Problems

Optimal Solution to
Business Problems
● Micro Economics: Managerial Economics is micro economic in its
nature because it deals with matters of a particular business firm
only.

● Use of Economic Theories: Managerial Economics uses all

economic theories relating to the profits, distribution of income etc.

● Realistic One: Managerial Economics is a realistic science. It

studies all matters concerning business organization by considering
the real conditions existing in the business field.

● Normative Science: Managerial Economics is a normative science.

It studies the matters concerning the aims and objectives of a
business firm. It determines the methods to be adopted for achieving
such objectives. It also makes enquiry into the good and bad in
decision making. Hence it is a normative science.
● Macro-Economic Uses: Even though Managerial Economics has
the nature of Micro-Economics, it also uses Macro-Economic
approaches frequently. Certain matters in Macro-Economics like
Business Cycles, National Income, Public Finance, Foreign trade
etc. are essential for Business Economics. So, Managerial
Economics uses the macro-economic phenomenon for taking
business decisions

● Economics is a science or an art-

▪ It is considered as science if it is a systemized body of knowledge

which studies the relationship between cause and effect.

▪ Art is nothing but practice of knowledge.
▪ Where as science teaches us to know and art teaches us to do.
▪ It is science in which methodology and art in its application
⮚ Managerial Economics is a Science-

What is Science? It is simply a systematic body of knowledge

which can establish a relationship between cause and effect. Further,
Mathematics, Statistics, and Econometrics are decision sciences.
Managerial Economics integrates these decision sciences with
Economic Theory to arrive at strategies to help businesses achieve
their goals. Hence, it follows scientific methods and also tests the
validity of the results. This is one aspect of the nature of business
economics.

⮚ It is an Art-

Managerial Economics is an art as it requires the practical

application of rules and principle to achieve set objectives. Art is a
behavioral knowledge and it tells the best method for doing any work.
Science gives theoretical knowledge whereas arts trains about the
behavioral activities.
● Demand Forecasting: Demand forecasting is an important topic studied in
Business Economics. Every business firm initiates and continues its production
process on the basis of the anticipation of more demand for its goods in the future.
It makes research and conducts market survey with a view to know the tastes and
fashions of the consumers. It pools up the resources and starts production for
meeting the future demand. Managerial Economics analyses the demand behavior
and forecasts the quantity demanded by the consumers.

● Cost Analysis: Managerial Economics deals with the analysis of different costs
incurred by the business firms. Every firm desires to minimize its costs and
increase its output by securing several economies of scale. But it does not know in
advance about the exact costs involved in production process. Managerial
Economics deals with the cost estimates and acquaints the entrepreneurs with the
cost analysis of their firm.

● Pricing Policies and Practices: Deciding the price is one of the important subject
of business economics. The success of a firm depends upon decisions regarding
prices.
● Capital Management : Capital management is another topic dealt in Business
Economics. It denotes planning and control of capital expenditure in business
organisation. It studies matters like cost of capital, rate of return, selection of best
project etc.

● Production Planning and Management: Every firm is engaged in certain

production, hence it has to plan and manage the production. Firm has to make
profitable decisions keeping its factors of production and the product in view.

● Profit Analysis: Every business firm aims to secure maximum profits. But at the
same time it faces uncertainty and risk in getting profits. It has to make innovations
in production and marketing of its goods. Managerial Economics deals with the
matters relating to profit analysis like profit techniques, policies and break-even
analysis.

● Decision Theory under Uncertainty: Uncertainties are many fold such as

uncertainty of demand, uncertainty of cost, uncertainty of capital etc. Many
statistical methods are developed for taking decision under condition of such
uncertainties.
● Helpful in Organizing: Business managers can learn through the study of
Managerial Economics what to produce, how to produce, for whom to
produce and when to produce. This helps them to organize well.

● Helpful in Planning: Managers with the use of Managerial Economics can

plan to mobilize and use resources effectively.

● Helpful in Decision making: Business manager can decide on the basis of

their knowledge of Managerial Economics number of relevant things such
as what kind of production should be undertaken, what should be the
technique etc. so as to get the maximum profit.

● Helpful in co-ordination: Managerial Economics helps to establish co

ordination between traditional theoretical concepts of economics and actual
business practices.
● Helpful in Formulating Business Policies: Managerial Economics helps
in deciding its policies for the real objectives and certain business situation
of the firm.

● Helpful in Cost Control

● Helpful in Demand Forecasting: Managerial Economics provides the use

of economic concepts for estimating economic relations among various
variables for managerial decisions.

● Minimizing Uncertainties:

● Helpful in Understanding External Environment: Managerial

Economics helps the business managers in understanding the external
environment in which the firm has to function and shows him the way to
co-ordinate his business with it.
 Basis of Economics Managerial Economics
differences

Scope Economics is the broad area of Managerial Economics is the micro

knowledge that includes economics, whose area is narrower
economic analysis of both Micro than macro economics.
and macro Economics

Science Economics is both Normative and Managerial Economics is mainly

Positive science. Normative science and it lies in the
group of social science.

Theory & It includes the study of economic It includes the study of both theory
Practice theories. and practice.

Importance of Their theories are based on In this most of the assumptions get
Assumptions various assumptions. lost in the practical applicability.
Thus, it based on real experience.
Basic of Economics Managerial Economics
Difference

Principal of In economics the study of various In this only profit theory of

Distribution theories of wages, rent, interest and distribution is studied.
profit are done under the principles
of distribution.

Economic and It is a pure economics and limits its Managerial Economics puts
Non-Economic work area to economic aspects emphasis on problems related to
aspects only. social and political along with
economic aspects.

Origin It is an ancient subject and it‟s It‟s a modern approach and

existence can be found even in vedic came into existence after second
era. world war
Managerial
Economist
● Business Economist is the practitioner of the science of managerial
economics.

● Companies employ business economists to guide them in making

appropriate economic decisions – present and future (forecasting –
short & long run)

● They wisely scan the competitive environment in which a firm

functions and suggest suitable policies for solution of problems.

The Economist as a Scientist

● Economics = science – conceptual

● Economists = scientists – practice / personal level.

▪ Business economist applies economics in decision-making. He uses the tools
of economic analysis in clarifying problems, in organizing and evaluating
information and in comparing alternative courses of action. He is concerned
with analytical tools that are useful, that have proven themselves in practice
or that promise to improve decision-making in the future.

▪ The role of Business Economist becomes increasingly important in view of

the different objectives of the firm. He has a significant role to play in
assisting the management of the firm in decision-making and forward
planning by using specialized skills and techniques. In advanced countries,
large companies employ Business Economist or Managerial Economist to
assist the management

▪ The economist is an expert model builder and this is the most important
thing which the economic theorist can contribute to the work of management
science. In management science it is important to be able to recognize the
structure of a managed problem. The second way in which economic theory
can help management science is to provide a set of analytical methods.
● Business Economic Advisers: They do research, collect information and
evaluate the business economic aspects that influence the growth and
development of the organization. directly answerable to the top
management and act in an advisory capacity.

● Business economists as full-time professional managers: Often

appointed as financial managers, marketing managers, production
managers and general managers.

● Academic economists: Business economists at universities - involved in

the activities such as applied business economic research, continuous
literary study, advise / liaison with business economists in practice,
attending seminars and conferences, presenting short courses and lectures
and training students in Business Management.

● Techno-economists: They are particularly research-orientated. Apart from

formal training in Business Management, they also have a qualification in a
technical or scientific field
● To bring reasonable profit to the company.
● To study external and internal factors influencing
the business
● To make accurate forecast.
● To establish and maintain contact with individual
and data sources.
● To keep the management informed of all the
possible economic trends.
● To participate in public debates
● To earn full status in the business team.
● Assisting the management towards facilitating
effective decision making and forward planning.
● Role and function of environmental scanning or analysis of the
external factor

● Role and function of analyzing internal factor or analysis of

business operation

● Specific functions and role

● Role and functions of providing economic intelligence

These are the factors over which the management has no control. These
factors related to business environment in which a firm has to operate such as
● Business policy of the government
● Competition

● Economic policy of the government

Advises to management on the problems regarding external factors

⮚ What changes have been taken place in policies government and what
more changes are expected in near future in this field ?
⮚ What type of cyclical fluctuations are expected in national economy in
future ?
⮚ What are the expectations of demand of goods being produced by the
enterprise ?
⮚ What changes are expected to take place
● Selection of product.
● Selection of suitable product mix.
● Selection of method of production.
● Product line decision.
● Determination of price and
quantity.
● Decision on promotional strategy.
● Optimum input combination.
● Allocation of resources
● Replacement decision.
● Make or buy decision.
● Shut down decision.
● Decision on export and import.
● Location decision.
● Capital budgeting.
● These are the factors affecting managerial decisions
over which the management has some control.

● These factors lie within the scope and operations of a

firm such as :

1.Determination of price policy

2.Decision of contraction or expansion of business
3.Determination of the level of efficiency in
operation
Managerial economist can advise management on following questions
relating to internal factors-

● What should be the sales budget for the next year?

● What would be the policy regarding inventory for next year?

● What should be the production ?

● What should be the wage policy ?

● What type of changes required in the credit policy of the orgn. ?

● What should be the policy regarding cash for next year.

● What should be the profit budget for next year?

● Sales forecasting
● market research
● Economic analysis of companies
● Pricing policy of industry
● Capital projects and production programme
● Security analysis and forecasts
● Advice on trade and public relations
● Economic analysis of agriculture
● Analysis of undeveloped economies
● Environmental forecasting
● To provide information related to the pure economics
to the Manager

● To provide appropriate information after analysis

● Helps in analyzing competitive price, tax rate, import-

export duty etc.
● Relationship with economics

● Management theory and accounting

● Managerial Economics and mathematics

● Managerial Economics and Statistics

● Managerial Economics and Operations Research

● Managerial Economics and Theory of Decision Making

The relationship between managerial economics and economics theory
may be viewed form the point of view of the two approaches-

Micro Economics and Marco Economics

▪ Microeconomics is the study of the economic behavior of individuals,

firms and other such micro organizations. Managerial economics is
rooted in Micro Economic theory.

▪ Managerial Economics makes use to several Micro Economic concepts

such as marginal cost, marginal revenue, elasticity of demand as well
as price theory and theories of market structure to name only a few.

▪ It deals with the analysis of national income, the level of employment,

general price level, consumption and investment in the economy and
even matters related to international trade, Money, public finance, etc.
● Managerial economics has been influenced by the developments
in management theory and accounting techniques. Accounting
refers to the recording of pecuniary transactions of the firm in
certain books

● A proper knowledge of accounting techniques is very essential

for the success of the firm because profit maximization is the
major objective of the firm.

● Managerial Economics requires a proper knowledge of cost and

revenue information and their classification.

● A student of managerial economics should be familiar with the

generation, interpretation and use of accounting data. The focus
of accounting within the firm is fast changing from the concepts
of store keeping to that if managerial decision making, this has
resulted in a new specialized area of study called “Managerial
● The use of mathematics is significant for managerial
economics in view of its profit maximization goal long with
optional use of resources.

● The major problem of the firm is how to minimize cost, how

to maximize profit or how to optimize sales.

● Mathematical concepts and techniques are

widely used in
economic logic to solve these problems

● Mathematical symbols are more convenient to handle and

understand various concepts like incremental cost, elasticity of
demand etc., Geometry, Algebra and calculus are the major
● Managerial Economics needs the tools of statistics in more than one
way.

● A successful businessman must correctly estimate the demand for

his product. He should be able to analyses the impact of variations
in tastes, Fashion and changes in income on demand only then he
can adjust his output.

● Statistical methods provide and sure base for decision- making.

Thus statistical tools are used in collecting data and analyzing them
to help in the decision making process.

● Managerial Economics also make use of correlation and multiple

regressions in related variables like price and demand to estimate
the extent of dependence of one variable on the other. The theory of
probability is very useful in problems involving uncertainty.
Mathematicians, statisticians, engineers and others join together
and developed models and analytical tools which have grown
into a specialised subject known as operation research. The basic
purpose of the approach is to develop a scientific model of the
system which may be utilised for policy making.

Operation research provides a scientific model of the system

and it helps managerial economists in the field of product
development, material management, and inventory control,
quality control, marketing and demand analysis. The varied
tools of operations Research are helpful to managerial
economists in decision- making.
● The theory of decision making is relatively a new subject that has
a significance for managerial economics. In the process of
management such as planning, organising, leading and
controlling, decision making is always essential. Decision
making is an integral part of today‟s business management. A
manager faces a number of problems connected with his/her
business such as production, inventory, cost, marketing, pricing,
investment and personnel.

● Economist are interested in the efficient use of scarce resources

hence they are naturally interested in business decision problems
and they apply economics in management of business problems.
Hence managerial economics is economics applied in decision
making.
 Aspect Neoclassical Model Sales Revenue Maximization
Model

Objective Profit maximization Sales revenue maximization

Focus Maximizing profits Maximizing sales revenue

Pricing Strategy Profit-oriented pricing Competitive pricing

Market Share Not a primary concern Emphasizes market share expansion

Customer Less emphasis on customer Emphasizes customer satisfaction

Orientation satisfaction

Long-Term Growth Important consideration Focus on sustaining revenue growth

Trade-Off with Revenue is a means to achieve Accepts lower short-term profitability

Profitability profitability

Market Dynamics Focus on supply and demand Focus on market penetration and
competition

Time Horizon Short-term and long-term Long-term perspective

perspective

Risk Management Consideration of risk and Potential risks for short-term gain
uncertainty
Quantity Total TFC AC TVC AVC MC
Cost
1 300 200 300 100 100 100

2 460 200 230 260 130 160

3 750 200 250 550 183 290

4 980 200 245 780 195 230

 Formula

TC= AC*Q MC= TCn - TCn-1

AVC= TVC/Q
TC= Σ MC
TVC= TC - TFC
Quantity Total TFC AC TVC AVC MC
Cost
1 300 200 300/1= (200- 100 (300-
300 100) 100 200)
2 460 200 260

3 200 250

4 200 230
 Theories of Firm

Profit
Maximizati
on and
Sales Maximization
 Profit Maximization Theory
The profit maximization model as a goal of the firm or profit
maximization theory of the firm was developed by classical
economists.
It means the classical and neo-classical economists regarded profit
maximization as the most important and primary objective of the
firms.
According to them, profit is the core concern of the business firm and
it is necessary for the existence and survival of the firms.
The profit maximization model is considered a traditional and
classical objective of the business firm. The model defined profit as
the gap between revenue and the total cost of the firm.
● The profit maximization hypothesis was developed during
1874-90 by loan Walras, W.S. Jevons and Alferd Marshall.

● It had been relevant till the 1930s before the emergence of

other theories since other objectives along with profit also
become important for the firm.

Condition of Profit Maximization-

The logic of the may
profit maximization resolution
explained and illustrated in two different ways-

i. by using total cost and total revenue schedules

ii. by using marginal cost and marginal revenue schedules.
● Total cost included all costs- explicit and Implicit- that
a firm has to incur in producing a commodity.

● Total revenue is the total money

received and income of the firm from the
sales of output.

● In the both short and long run the differences between

the firm‟s TR and TC is its profit or loss.

Thus, Profit= Total Revenue – Total Cost

Total Cost and Revenue Approach
● The firm should produced the output at which
marginal revenue is equal to marginal cost
(MR=MC)

● The MC curve should intersect the MR Curve from

below and not from above. This means that MC is
less than MR to the right of the profit maximizing
output level.
MC & MR Approach
 Criticisms of the model
• In the modern times business firms operates at a larger scale
and in such case the owner himself/herself cannot manage his
business, thus the assumption of the owner itself manager is
not applied.

• The goal of the firm to maximize the profit as much as possible

may not be the ultimate objective all the time.

• Risk association factors are not considered in the model.

• The model talked about a particular firm but did not explain the
relation of the firm with other firms and stakeholders in
society.

• This model did not include a time element.

 BEHAVIOR MODEL Of
BUSINESS OBJECTIVES

(Cyert and March Hypothesis

of Satisfying Behavior)
● The behavioral theory of firm was developed by Cyert and March
focuses on the decision making process of the large multi product
firm under uncertainty in an imperfect market.

● They deal with the large corporate managerial business in which

ownership is separated.

● Their theory originated from the concern about the organizational

problem with the internal structure of such firm creates and from the
need to investigate the effect on the decision making process in
these large organization.

● The internal organizational actors may well explain the difference in

the reactions of firms to the same external stimuli, that to the same
changes in their economic environment.
● The assumptions underlying the behavioral theories about the complex
nature of the firm introduces an element of realism into the theory of
the firm.

● The firm is not treated as a single-goal, single decision unit, as in the

traditional theory, but as a multi goal, multi decision organization
coalition.

● The firm is as a coalition of different groups which are connected with

its activity; in various ways, managers, workers, shareholders,
customers, suppliers, bankers, tax inspectors and so on. Each group has
its own set of goals or demands.

● The behavioral theory recognizes explicitly that there exists a basic

dichotomy in the firm, there are individual members of the coalition
firm and there is the organization coalition known as „the firm‟.

● The consequence of the dichotomy is a conflict of goals; individuals

may have different goals to those of the organization firm.
● Cyert and March argue that the goals of the firm depend on the demand of the
members of the coalition, while the demand of these members are determined by
various factors such as aspiration of the members, their success in the past in
occupying their demands, the expectations, the achievements of other groups in the
same or other firms, the information available to them.

● The top management has several tasks; to get the goals of the firm which are often in
conflict with the demands of the various groups, to resolve the conflict between the
various groups, to reconcile as far as possible the conflict in goals of the firm and of
its individual groups.

●Coalitionconsist of the various group associated with the following-

1- Shareholders, who wants high profits and fast rate of growth.
2 Managers who wants high salaries and perks, power domination and leadership
3 workers who want high wages and salaries, better
working conditions, quick promotions etc.
According to them each group has its own set of aims and demands, the demands of one
group are in conflict with those of others.
● Production Goal: The production goal originates from the production
department. The main goal of the production manager is the smooth
running of the production process. Production should be distributed evenly
over time, irrespective of possible seasonal fluctuations of demand, so as to
avoid excess capacity and lay off of workers at some periods and over
working the plant and resorting to rush recruitment of workers at other
times with the consequence of higher, costs due to excess capacity and
dismissal payments or too frequent breakdowns of machinery and waste of
raw materials in period of rush production.

● Inventory Goal: The inventory goal originates mainly from the inventory
department if such a department exists, or from the sales and production
department. The sales department wants an adequate stock of output for the
customers, while the production department needs adequate stocks of raw
materials and other items necessary for a smooth flow of the output
process.
● Sales Goal: The sales goal and the share of the market goal
originate from the sales department. The same department will also
normally set the „sales strategy‟ that is decided on the advertising
campaigns, the market research programs, and so on.

● Profit Goal: The profit goals is set by the management so as to

satisfy the demand of share holders and the expectations of bankers
and other finance institutions; and also to create funds with which
they can accomplish their own goals and projects, or satisfy the
other goals of the firm.

● Share of the market goal: While making decisions, the firms are
guided by these goals. All goals must be satisfied but there is an
implicit order of priority among them. The conflict among different
goals may crop up.
 Solution of conflicting goal (short run)

1- Satisficing Behaviour:

Besides side payments, the conflicting goals of the organisation

are resolved by subjecting them to a constant review. This is
because ‘aspiration levels’ of coalition members change with
experience. In fact, the aspiration levels change with the
process of satisficing. Each person in the organisation has a
satisficing level for each of his goals.
2- Organisational Slack
This difference between total available resources and total
necessary payments is called organisational slack, by Cyert and
March. Slack consists in payments to members of the coalition
in excess of what is required to maintain the organisation.

Many forms of slack exist when the organisation operates under

market imperfections. The shareholders may be paid dividends
in excess of what is required to keep them within the
organisation. The customers may be charged lower prices so that
they may stick to the products of the firm.
● The behavioral theory relates to a duopoly firm and fails as the theory of
market structures. It does not explain the interdependence and interaction
of firms, nor the way in which the interrelationship of firms leads to
equilibrium of output and price at the industry level. Thus, the conditions
for the attainment of a stable equilibrium in the industry are not
determined.

● The theory does not consider either the conditions of entry the effects on
the behavior of existing firms of a threat of potential entry by firms.

● The behavioral theory explains the short-run behavior of firms and ignores
their long-run behavior. It cannot explain the dynamic aspects of inventions
and innovations which are related to the long-run.

● The behavior theory is based on the simulations approach which is a

predictive technique. It simply products the behavior of the firm but does
not explain it.
MANAGERIA
L
DISCRETION
THEORY
● The theory of Managerial Utility Maximisation was developed
separately by Berle-Means-Galbralth and Williamson.

● It is also known as Managerial Discretion Theory.

● The Theory is based on the concept that shareholders or owners of

the firm and managers are two separate groups.

● The owners or the shareholders want high dividends and, therefore,

interested In maximising profits, the managers, on the other hand,
have different motives other than profit maximisation.

● Once the managers have achieved a level of profit that will pay
satisfactory dividends to shareholders and still ensure growth.
● Williamson argues that managers have discretion in pursuing policies
which maximise their own utility rather than attempting the maximisation
of profits which maximises the utility of owner-shareholders.

● Profit acts as a constraint to this managerial behaviour, in that the financial

market and the shareholders require a minimum profit to be paid out in the
form of dividends, otherwise the job security of managers is endangered.

● The managerial utility function includes such variables as salary, security,

power, status, prestige, professional excellence of these variables only the
first (salary) is measurable.

● The others are non-pecuniary and if they are to be operational they must be
expressed in terms of other variables with which they are connected and
which are measurable.

● This is attained by the concept of expense preference, which is defined as

the satisfaction which managers derive from certain types of expenditures.
1) Staff expenditure used as a for sales.
(S) management proxy Includes
expenditure.
salaries, More the staff administrative
exp., more sales. expenses,
Power and prestige
of managers increases with S. selling
2) Management emoluments, (M) or management slack – i.e.
luxurious offices, fancy cars, house, etc.,
3) Discretionary investments, (Io) amount spent at his own
discretion, e.g. on latest equipment, furniture, decoration material,
etc. to satisfies ego and give them a sense of pride. These give a
boost to the manager's esteem and status in the organisation.

Managers use that combination of above

variables that maximises
their own satisfaction.
Maximise Um = f(S, M, Io)
Where Um = Manager‟s
Discretion of managers: where owners and
govt expectations are satisfied.

● Minimum Profit Restraint = Minimum rate of dividend

+ Minimum investment + Tax on profits

Actual Profit > Minimum Profit

● Difference between Maximum possible

Profit and Minimum profit constraint = Area of
Discretion.

● Larger the gap, more the discretion of managers.

 SALES
MAXIMIZATION
THEORY
● Prof. Baumol in his book Business Behaviour, Value and Growth
(1967) has presented a managerial theory of the firm based on sales
maximisation.

● By sales he meant total revenue earned by the sale of goods. That is

why this goal is also referred to as Sales Maximisation Goal.

● According to this theory, once profits reach acceptable levels, the

goal of the firms become maximisation of sales revenue rather than
maximisation of profits.

● In the words of Baumoul, 'The sales maximisation goal says that

managers of firms seek to maximise their sales revenue subject to
the constraint of earning a satisfactory profits. “

● While studying this theory one must be kept in view that firms do
not Ignore profit altogether. They do aspire to attain a general level
of profit.
● The firm is oligopolistic whose cost curve are U-shaped and
the demand curve is downward sloping.

● The firm aims at maximising its total sales revenue in the long
run subject to a profit constraint.

● There is a single period time horizon of the firm.

● The firm‟s minimum profit constraint is set competitively in

terms of the current market value of its shares.
● A firm attaches great importance to the magnitude of sales and is
much concerned about declining.

● If the sales of a firm are declining,

banks, creditors and the
capital market are not prepared to provide finance to it.

● Its own distributors and dealers might stop taking interest in it.

● Consumers might not buy its product because of its unpopularity.

● Firm reduces its managerial and other staff with fall in sales.

● But if firm‟s sales are large, there are economies of scale and the
firm expands and earns large profits.

● Salaries of workers and management also depend to a large

Marris’s Model of the
Managerial Enterprise
 Marris’s Model of the Managerial
Enterprise (With Diagrams)

Robin Marris in his book The Economic Theory of

‘Managerial’ Capitalism (1964) has developed a dynamic
balanced growth maximising model of the firm. He
concentrates on the proposition that modem big firms are
managed by managers and the shareholders are the owners
who decide about the management of the firms.
 I. Goals of the Firm:
The goal of the firm in Marris’s model is the maximisation of
the balanced rate of growth of the firm, that is, the
maximisation of the rate of growth of demand for the
products of the firm, and of the growth of its capital supply:
Maximise g = gD = gc

where g = balanced growth rate

gD = growth of demand for the products of the firm
gc = growth of the supply of capital
 The firm has two constraints

Firstly, a constraint set by the available

managerial team and its skills. Secondly, a
financial constraint, set by the desire of
managers to achieve maximum job security.
 Thus managers want to maximise their own utility

UM = (salaries, power, status, job security)

while the owners seek the maximisation of their utility

U0 = f* (profits, capital, output, market share, public esteem).

Marris argues that the difference between the goals of managers and
the goals of the owners is not so wide as other managerial theories
claim, because most of the variables appearing in both functions are
strongly correlated with a single variable the size of the firm (see
below). There are various measures (indicators) of size capital, output,
revenue, market share, and there is no consensus about which of these
measures is the best.
 Managerial utility function

the utility function of owners can be written as follows

Uowners = f*(gc)

where gc = rate of growth of capital.

Therefore the managerial utility function may be written as follows

UM = f (gD, s)

where gD = rate of growth of demand for the products of the firm

s = a measure of job security.

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