Outline and assess Penrose's 'Theory of the Growth of the Firm'

Essay by iceman543University, Bachelor'sB, May 2004

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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.