Business Economics Laissez Faire Theory

Questions: 1. Prepare a report mentioning the different objectives for the new startup company Careem. 2. Describe General theories and business economic theories. 3. AL Rash insurance offers mail-order automobile insurance to preferred-risk drivers in Dubai. The company is the low-cost provider of insurance in this market but does not believe its $750 annual premium can be raised for competitive reasons. Its rates are expected to remain stable during coming periods; hence, P = MR = $750. Total and marginal cost relations for the company are as follows: TC = $2,500,000 + $500Q + $0.005Q2 MC = $500 + $0.01Q Calculate the profit-maximizing activity level. Calculate the companys optimal profit. Answers: 1. Objectives of the Company In order to make sure about the long-term success of the new start-up company, Careem, SMART business objectives will be defined. SMART refers to specific, measurable, achievable, realistic, and time oriented goals (Hamel and Prahalad, 2010). SMART objectives will be set because they can also be used as performance measures to determine the successful launching of the business. Such objectives will also provide a clear and right path to the firm to attain number one position in the market as well as attain competitive advantage over competitors like Uber. The objectives are as follow: To successfully launch Careem in the market with the end of the first year. To attain a market share of above 20% in the first year and more than 40% by the end of third year. To achieve a profit margin growth of 15% in the next three years. To increase sales revenue by 30-40% each year after the end of the first year. To ensure the effectiveness of the technologies used so that the success of the business can be ensured. To create customer loyalty and strengthen the brand image constantly. The above identified objectives are effective for the company as these assist in developing timescale as well as ensure the utilization of suitable sources to attain these objectives (Huselid, Becker and Beatty, 2005). 2. General Theory Laissez Faire Theory: This theory depends upon the belief of a free and independent market. As per this theory, 'free market' must be at least considered as a sensible and coherent way of believing and talking about economic relations among people (Olsen, 1995). Moreover, this theory also states that the market is natural, which demonstrates actual supply and demand and also independent, in which it can function independently of the state. For instance, social and economic inequalities that remain after the introduction of the liberal state are viewed as natural and beyond the proper scope of state activity (Olsen, 1995). Business Economics Theories Sales Maximization Theory: In this theory, the firm attempts to maximize sales volume to a minimum profit constraint (George, Joll, and Lynk, 2005). William Baumol and other developed a sales maximization model, which states that the managers of the modern companies should focus on maximizing sales after the earning of a suitable rate of profit to satisfy shareholders (Mathew, 2010). The main assumptions of this theory include single period time horizon, aim of sales maximization, oligopolistic firms and profit constraints based on the current market situation. There are certain factors that promote this theory. These factors include salary of manager also more closely associated with sales revenue than profits, financing of firms are based on sales revenue, it also indicates the firm's performance, and increasing sales strengthen the firm's competitive position (Dwivedi, 2002). Theory of Firm: The theory of the firm is founded in neoclassical economics and it is a microeconomic concept, which states that firms including corporations and businesses have an existence and emphasize on profit maximization (Foss, 2000). Thus, it is clear that in the theory of the firm, a particular business firm's behaviour is aimed towards profit maximization. In addition, to maximize the business profits, this theory regulates decision-making process in different areas including allocation of resources, adjustment of prices, production techniques and produced quantity. Moreover, with the consumer theory, the theory of the firm continues. In contrast to the theory of the firm, theory of consumer attempts to maximize the overall utility or the perceived value. Theories of Profit: There are several theories of profit, which are beneficial to understand how many firms earn considerable economic profits or meaningful losses. One of the important theories is frictional profit theory (disequilibrium profit theory), which states that sometimes market are in disequilibrium due to the unexpected changes in cost and demand situations (Hirschey, 2008). Furthermore, unanticipated changes result in positive or negative economic profits for some firms. The another theory is monopoly profit theory, which is an extension of frictional profit theory. This theory states that above-normal profits are earned by some firms because they are protected from competition by high entry barriers including huge capital requirements, economies of scale, patents, customer loyalty, etc (Hirschey, 2008). In addition, innovation profit theory is also an effective theory of profit, which comes under compensatory profit theories. Theory of innovation profit describes above normal profits that come up after the successful invention and modernization (Hirschey, 2008). For example, on the basis of innovation profit theory, it can be discussed that Microsoft and Apple Corporation earned superior profits because they successfully introduced and marketed their products. In this, it is found that Microsoft successfully launched graphical user interface and Apple introduced its iPod line of video players and digital music (Hirschey, 2008). Moreover, there are also other important profit theories including wages theory, differential rent theory, and risk theory, which can be used to understand the term profit (Schumpeter, 2011). Overall, it can be stated that different theories of profit are effective to develop knowledge about how firms earn economic benefits or losses. 3. Profit-Maximizing Activity Level In order to identify the profit-maximizing activity level, MR = MC will be set and solved for Q. Thus, the calculations are as below: MR = MC $750 = $500 + $0.01Q 0.01Q = $250 Q = $250/0.01 Q = 25,000 Thus, Q = 25,000 is a profit maximizing activity level (as M2 /MQ2 0), because profits are decreasing for Q ? 25,000. Company's Optimal Profit In order to calculate optimal profit for the company, firstly, total revenue function for the firm is determined as below: TR = P * Q or $750Q Hence, total profit will be Profit = TR-TC = $750Q - $2,500,000 + $500Q + $0.005Q2 = 750(25000) - 2,500,000 - 500(25000) - $0.005(250002) = 18,750,000 - 2,500,000 - 12500000 - 3125000 = $625,000 Thus, it shows that the firm's optimal profit is $625,000. References Dwivedi, D. N. (2002) Microeconomics: Theory And Applications. Pearson Education Inc. Foss, N. J. (2000) The Theory of the Firm: Critical Perspectives on Business and Management, Volume 4. UK: Taylor Francis. George, K., Joll, C., and Lynk, E. L. (2005) Industrial Organization: Competition, Growth and Structural Change. UK: Routledge. Hamel, G and Prahalad, C. K. (2010) Strategic Intent. Great Britain: Harvard Business Press. Huselid, M. A., Becker, B. E and Beatty, R. W. (2005) The Workforce Scorecard: Managing Human Capital to Execute Strategy. Great Britain: Harvard Business Press. Hirschey, M. (2008) Fundamentals of Managerial Economics. USA: Cengage Learning. Mathew, E. (2010) Methodology Of Business Education. Pearson Education Inc. Olsen, F. (1995) Feminist Legal Theory, Volume 1. NYU Press. Schumpeter, J. A. (2011)The Theory of Economic Development: An Inquiry into Profits, Capital, Credit, Interest, and the Business Cycle. Transaction Publishers.