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Outline And Assess Penrose's 'theory Of The Growth Of The Firm'

1697 words - 7 pages

Traditional theories of the firm were based around models that assumed a static industry, where thee firm is assumed to be a profit maximiser and in its simplest terms, has an industry equilibrium at a profit-maximizing level of prices and quantities. There have been several objections to the traditional theory, which has pushed for several economists to come up with a new theory, which may correct some of the problems found inherently within the original theory. One such economist is Edith Penrose, who's 'Theory of the Growth of the Firm' helps to give a more individual firm perspective, but does this theory give a more acceptable perspective than the traditional theory to that point where the traditional theory can be scraped?The traditional theory of the firm is based on the idea that firms are rational and follow the single objective of profit maximization as individual owners are greedy and desire only money. This theory shows that firms will produce where their 'Marginal Costs' are equal to their 'Marginal Revenues' and that all factors affecting the firm are known, i.e. the industry has perfect knowledge. Under this assumption all factors remain unchanged i.e. the demand, supply and technology all remains at the same level and therefore the prices and outputs of the firm are defined by this equilibrium state of the singular product firm. But this theory has come under scrutiny for several reasons.One of the main objections of this theory is that the objective of profit maximsation is too simple and it does not take into consideration the multiple objectives that a firm will have in reality. Theorists agree that profit maximization is important to the long run survival of the firm but there are several other objectives that a firm may follow. Hall and Hitch pointed out another problem with the theory, in their 1939 firm study, they found firms tend to price using a full costing/cost plus method and not an industry defined price through the use of Marginal Costs and Revenues. To gain the true marginals of production is very difficult, firms tend to be multi-product and suggesting to know the marginals suggests that all demand levels are known, but in reality it is impossible to know all the information within an industry; for example, a firms decisions are unknown to its competitors and may cause problems if a firm needs to know these to make its own decisions, i.e. they are interrelated within an oligopolistic industry. This also relates to the idea that firm makes its pricing decisions not simply on the market-defined levels but within an oligopolistic interdependence, where the predefined perfectly competitive industry becomes obscelete and the theory collapses. A final objection of the theory is the idea that in reality the theory of a firm is not static and does not remain at the same state where the market conditions don't change. Some believe that the firm attempts not only to earn profits but also to grow and change, so as to gain...

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