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The Objectives of Organisations

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Title: The Objectives of Organisations


1
The Objectives of Organisations
SM139
  • Kevin Hinde

2
What are organisations?
  • Even in the most libertarian of free-market
    economies, individuals voluntarily surrender
    their freedom of action in order to form and join
    organisations.
  • Bruce Lyons in Hargreaves Heap et al (1993) The
    Theory of Choice. A critical guide, Blackwell,
    London. p155.
  • They transform inputs into outputs with some aim
    in mind.

3
Types of organisations
  • Private sector
  • Small business, partnerships, cooperatives,
    Limited Companies (including large
    multinationals.
  • Public sector
  • Local government, Central Government, schools,
    hospitals
  • Quasi-Governmental
  • Regulators such as OFTEL, OFT
  • Charitable Sector
  • What about churches, trade unions?

4
Public sector
  • Public Interest Theory
  • Civil Servants and politicians seen as maximisers
    of social welfare.
  • acting in pursuit of the public rather than
    private interests, e.g. where markets fail.
  • Civil servant seen to be trustworthy and a
    disinterested expert.

5
Criticism of Public interest theory
  • difficulties in defining the public interest.
  • Institutions seen as political instruments
  • Regulators are usually politicians or civil
    servants and critics argue that they have their
    own agendas.
  • regulatory capture.
  • competition for power between interest groups
    which provides the various forms of regulation.
  • Alternative views
  • Niskanen (1971) emphasises the propensity of
    bureaucrats to maximise agency budgets.
  • Dunleavy (1991) notes how agents of regulation
    engage in bureau-shaping to create job
    satisfaction.
  • Majone (1996) points out how regulators seek to
    maximise the scope of their political influence
    across activities and space

6
However
  • Civil servants and politicians are accountable to
    parliaments parliamentary bodies and independent
    scrutinisers
  • (e.g. the National Audit Office and the Media).
  • Civil servants can act in the public interest if
    appropriate incentive schemes are in place.
  • the existence of a competitive managerial labour
    market as well as remuneration packages.
  • There has also been a greater emphasis on
    competition in recent times, e.g privatisation,
    liberalisation, compulsory competitive tendering,
    Best Value.

7
Private sector firms
  • Objectives are varied but the dominant one is
    profit maximisation.
  • But what is profit maximisation?
  • This occurs at the output level where the
    organisation's Total revenue (TR) most greatly
    exceeds its Total Cost (TC )

8
Normal profit and economic profit
  • Economists definition of cost
  • The opportunity cost of an input. I.e. the cost
    of putting that input to its next best
    alternative use.
  • However, economists include normal profit in
    their analysis of costs.
  • normal profit, i.e. a return to the investors
    /entrepreneurs that reflects the risk associated
    with their investment and which just keeps them
    from exiting that activity.
  • Economic profit (Sometimes called abnormal or
    supernormal profit) is profit from market power.
    In perfect competition firms can only earn a
    normal return in the long run.

9
A simple example
  • Assume a linear demand and constant marginal (and
    so average) costs.
  • We will use a numerical example.

10
Total Revenue
11
Demand and Total Revenue
TR
Graph A
9
TR
0
6
3
Q
6
D
Price
Graph B
3
AR D
0
3
6
Q
12
Marginal Revenue
TR
Graph A
TR
0
Q
P,MR
Graph B
AR D
0
Q
13
Costs and profit
TC
Graph A
TC
0
Q
MC
Graph B
MCAC
0
Q
14
Profit maximisation under perfect competition
Break even?
TR, TC
Graph A
TC
X
TR
0
Q
P,MR, MC
Graph B
Y
MCAC
AR D
0
Q
Qpc
MR
15
Profit maximisation with market power
TR,TC
C
Graph A
TC
TR
0
Q
P,MR, MC
Graph B
X
MCAC
AR D
0
Q
Qm
Qpc
MR
16
Profit maximisation with market power
TR,TC
C
Graph A
TC
TR
0
Q
P,MR, MC
Graph B
Pm
MCAC
Ppc
AR D
0
Q
Qm
Qpc
MR
17
Alternatives to profit maximisation the divorce
of ownership from control
  • Sales maximisation (Baumol 1959)
  • Growth maximisation (Marris 1964)
  • Utility maximisation (Williamson 1959)
  • Satisficing (Cyert and March 1963). Emphasis on
    managers with bounded rationality.

18
However, profit maximisation bounces back.
  • The Firm is a legal fiction that serves as a
    nexus of contracts Jensen M. C and Meckling W. H
    (1976).
  • Principal Agent analysis stresses the role of
    incentives to encourage errant managers to
    maximise profits rather than their own objectives.
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