December 11, 2011

Managerial Economics of Profit - Economics for CEO - Review Notes

"A business firm is an organization designed to make profits and profits are the primary measure of its success." Joel Dean

Business organizations operate within the societies and societies expect quality of products, reliable supply in quantity and place etc. To make profits, firms have to satisfy the desires of the buyers and other stakeholders of the society. The firm can continue as profit system only by satisfying the stakeholders. But within the system of profits, profits are the acid test of the individual's firm's performance.

Joel Dean highlighted three issues regarding profit.

1. Profit measurement - Economic analysis of accounting data for policy making
2. Policy decisions on profit standards and profit goals
3. Use of profits for control purposes in complex business organizations.

Economic Analysis of Profits Measurement by Accoutants

"Economists are unhappy about conventional accounting methods for measuring business income."

Conceptual conflict

Economists look to the future and economic decisions taken today produce profits in the future. For decision making today past is irrelevant, excepting for its use in forecasting for the future.

Joel Dean discussed four issues specially.

1. The types of costs to be deducted from revenues to arrive at profit.
2. Depreciation
3. The treatment of capital gains and losses
4. Price level basis of valuation of assets.

Policy decisions on profit standards and profit goals

Reasons for Limiting Profits

it is an interesting topic and Joel Dean brought into explanation at the start of the topic.

1. To discourage potential competitors.
2. To woo the voting public and restrain the zeal of antitrusters.
3. To restrain wage demands of organized labor.
4. To maintain customer good will
5. To keep control undiluted.
6. To maintain pleasant working cnditions.

Joel Dean highlighted the need for restraining profits and gave some guidelines for determining reasonable profits.

Profits for Control

1. In divisional organization, where products are different:
2. In vertically integrated organization

There is complexity in this issue, and the conclusion is that profit standard for control must be set largely by managerial ukase, designed with discretion and wisdom.

Meaning of "ukase": edict of Tsarist Russian government,
From Russian Ukaz: ordinance, edict
to be understood as discretionary order

Originally posted at

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