What is the company theory?

In economics, the company theory is a principle used to predict how businesses will act on the basis of what theory claims to be a company or business. In this case, it states that all decisions are made with the final goal of maximizing profits. Although this may seem to be an apparent statement, the theory helps to predict and explain other types of decisions made in the organization. If the final goal of the company is to maximize its profit margins, then finding the cheapest way to produce its products is understandable. The theory does not allow benevolence, such as a good company neighbor.

This theory can also help explain why some laws are adopted and others are not. For example, if society can get away to spend less money by polluting or ignoring some security practices, according to theory, they will probably be. However, if such steps come with considerable punishment such as fines or other such events, the organization will be less likely to beinvolved in such behavior. This is because these fines would try to minimize profits. The question is in such cases to determine whether the fines would cost more than the provision of other equipment and processes needed to prevent punishment. Finally, the risk must be greater than the reward.

While the theory of the company in some cases makes a lot of sense and is a good start of explanation of certain business phenomena, it does not explain everything. In some cases, different companies may have different goals other than maximizing profits and some of course do not have a profit. These non -profit agencies can operate within another set of motivations that are not solved in theory.

For these and other reasons, some economists claim that the company theory needs a complete revision. The theory, published in the 19th century, does not fit neatly into the economy of the 21st century, with many shareholders share in the decision -making process. Some managers may also be interested only in profits, but also to build a good reputation for SOCINost and have happy employees. In these cases, theories would not always make much sense.