Theories of the firm - neoclassical and managerial decision making

Seminar paper from the year 2004 in the subject Economics - Macro-economics general grade: 16 University of Wales Newport course: Course Title: Decision Making (B.Sc. Business Undergraduate Programme) language: English abstract: For a long time economists have seen the firm as a black box arguing that firms maximise profits. Without following this ultimate goal economists say that organisations would not survive in competitive markets (Makamason 2004). In order not to be replaced managers would have to comply with the objective of profit (value) maximisation. Hart (1989) says that this neoclassical view of the firm has been challenged considerably over the last three decades due to theoretical developments and increasing empirical evidence that managers may not pursue shareholder interests.The key assumptions of the traditional theory of the firm are maximisation of profit and decision making under conditions of perfect knowledge (Nellis and Parker 2002). By ignoring many other involved complexities this neoclassical approach has the ability to predict corporate behaviour in perfectly competitive and monopoly market structures. The maximisation assumption portrays the firm as a single market single product asset of the owner who adapts a production plan in response to changing market conditions (Makamason 2004). Its prolonged survival is due to the useful analysis of how a firm's production choices respond to exogenous change in the environment. Such an example being an increase in wages or a sales tax (Loasby 1989).