Essay on The Traditional Theory Of The Firm

702 Words 3 Pages
As per the above discussion question, the aim of this paper is to review about the traditional theory of the firm is laid off due to the principal-agent problem.

‘Theory of the Firm ' is a microeconomic concept that states that firms (organisations) subsist and make decisions in order to maximize profits. Trade work together with the market to establish pricing and demand and then distribute resources according to representation that give the impression of being to maximize net profits. The principal goal of an organization is value maximization. The value of a firm is determined by the long-term confrontation of managerial decisions on profits.

'Principal-Agent Problem ' is the conflicts of interest and ethical exposure issues that occur when a principal (owner) employ an agent (manager) to execute specific missions that are in the best interest of the principal (owner) but perhaps expensive, or not in the best interests of the agent (manager).

The aim of the organisation is to maximize the profits means, which the organisation’s aim is to maximize its value, which is the present value of current and future profits.
Profit = Total Revenue – Total Costs as a result, profit maximisation take place at the major breach between Total revenue and total costs. A firm can maximise profits if it make an output where Marginal revenue (MR) = Marginal cost (MC)

Sales maximization and profit maximization are different business objectives. Sales maximization is a way to benefit…

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