Page 315 - DECO401_MICROECONOMIC_THEORY_ENGLISH

Microeconomic Theory

Notes described in individual demand curve, the price of product on kink that is profit maximization price
in marginal cost in large area and this cuts marginal income curve in discontinuous way.
2. Whose Full Cost: The main error of this firm due to failing of describing firm, where full cost will
decide the price in oligopoly market and other firms will follow this price. Thus the possibilities of
leadership of price are included in which Hall-Hitch and Andrews did not think.
3. Firms do not Follow Rigid Prices: Theory of full cost pricing is criticized due to joint with constant
price. Firms generally down their pricing in crisis and up their prices in good condition. Thus firms
follow independence price theory rather than fixed price.
4. Profit Margin Vague Concept: Apart from this, “Good Profit Condition” or “Fixing of Cost Price”
as Andrews states is not clear. It is clear in theory, how cost determination limit is determined and is
applied by the firms. Firm can put less or high price depending upon the cost and demand of product.
5. Weak Empirical Basis: The implementation of full cost theory is weak for two reasons. (i) All 30
firms, who accepted the theory, only 12 from them follow strictly. But these firms were trying to
add in cost varied estimated production. Some firms have taken full cost, but few of them accepted
real or preplanned production. Other 18 firms usually accepted full cost but in market time, firms
are got ready to put lower price, in this situation only 2 firms told that, they would grow the price in
good time. In this way various firms have explained theory of full cost. (ii) Hall and Hitch told that
most of the firms were not clear about flexibility and they did not try to get the demand estimation.
And the firm who did this, they obtained useless information.
6. Full Cost Principle not Obeyed Strictly: Apart from this, in the process of pricing decision through
experimental studies in England and America, information come to know that firms estimate an
average type of price decision but they do not follow principle strictly. As Bain has written that
the group of merchants do not want to say to economist about how they decided their prices, and
how is relation with opposite firm. By doing this they do not want to bare losses or do not want
governement interference. And they could make good image.
7. Firms Follow Marginal Principle: Last but not the less important, there is no support for Hall
and Hitch’s full cost pricing principle in the Earlay’s study of 110 companies which are operated
in America in good position. Earlay has not seen trust in the theory of full cost. He told that, most
of the firm adopted the methods of price decision, marketing and new product. He told this price
determination theory of firms as “gone away frontier”.
In spite of these criticisms, full cost theory was the first effort by economists for the study about
commercial firm’s behaviour and after this, Simon, Williamson, Baimol, Morris, Sayart and March
have studied the investigation about the firm’s behaviour .

18.3 Summary

· Profit maximization theory is based on the assumption that, the firms have all the own knowledge
and cost and arrivals of other firms but the fact is that the firm has no full knowledge by this they
work. Actually, they know about their production cost, but cannot be assured for demand curve of
market. They always work in uncertain condition and by this way it becomes weak to the theory of
profit maximization because it is considered in theory that firm is sure for everything.

18.4 Keywords

· Price-Maker: Making the Price
· Separation: Isolation
· Duration: Time Period.

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