Question 1: What are the objectives of the firm in a capitalist economy? A capitalist economy is an economic system that is based on the principles of supply and demand. In a capitalist economy, there is no government intervention. The market forces of supply and demand are left to control the market, that is, determine the prices of good and services. The objectives of a firm operating in a capitalist economy include profit maximization, sales maximization, growth maximization (İbrahim, 2009). Profit maximizationProfit maximization is the main objective of all firms. It is the process by which firms aim at acquiring the highest achievable levels of profit in the process of producing and selling goods and services.
In economic analysis, firms undertake activities and actions that are aimed at increasing profits (İbrahim, 2009). The difference between total revenue obtained by selling output and total cost that is used in producing output in a firm is the profit. Therefore, firms with an objective of maximizing profits cuts on their costs of production maximize revenues in order to generate the highest difference between total costs and total revenues.
Sales maximization This is another objective of a firm in a capitalist economy. Maximizing sales involves selling as much output as probable. Firms that maximize sales are bound to maximize their revenues. However, it is not a guarantee that firms maximizing sales will essentially maximize their profits, this is because; increasing sales can lead to increase in the cost of production such that marginal cost surpasses marginal revenues (İbrahim, 2009). A firm benefits from sales maximization in that, it obtains a competitive advantage over its rivals and at the same time increasing its monopoly power in such a way that, it can increase its prices thus, maximizes profits.
Growth maximization is the same as sales maximization and it involves takeovers and mergers. Question 2: Discuss the view that the Keynesian theory of circular flow of money does not provide a full explanation of 21st century economy, and the private sector will fulfill the role of Government in maintaining the levels of aggregate demand. Use any graphs, diagrams or calculations to illustrate this view? Keynes tried to analyze aggregate demand using the circular flow diagram.
The diagram indicates how income earned is spent thus supporting a circular flow of money which sustains a normal functioning economy (Peter, 2000). Keynes argued that, people should not hoard money as this will break the continuous money flow. Some critiques argue that, Keynesian theory of circular flow of money does not provide a full explanation of the 21st century economy. This is based on the fact that savings and investments, GDP and money growth are not well addressed. Keynesian theory of circular flow of money does not indicate individuals or corporations responsible for financial saving and how these savings gets back into the flow through consumer credit financed consumption and business investments.
On the issue of GDP and money growth, Keynes, in the circular flow does not explain how money created by financial systems finds its way into the flow, or how it exits and become locked into the money inventory stocks. In order to maintain levels of aggregate demand, there should be increased government spending, GDP growth, increased household employment which as a result increases levels of income flow thus increasing aggregate demand (Peter, 2000).
The circular flow of money does not explain how this can be achieved especially in the changing economic times of the 21st century. It is true that, to some extent, the private sector has taken the governments responsibilities of marinating aggregate demand. In this century, most employments with good wages are offered by the private sectors. This as a result has increased income levels and it is evident that, incomes are directly related to demand levels.