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Survival
The assumption that firms maximize
profit allows economists to develop the theory of the
firm in a mathematical framework with an elegance and
simplicity that would otherwise not be possible. Before we
accept this assumption, however, let us take a look at a
different assumption, that organizations simply try to
survive. The assumption that members of the firm want
the firm to survive may be a more realistic assumption than
the assumption that firms attempt to maximize profits. The
continued existence of the firm provides benefits to owners,
managers, and workers. Members of the firms can and do try
to eliminate other members whose actions threaten the
survival or health of the firm. Because survival of the firm
requires profit, the assumption that members of the firm
want the firm to survive is equivalent to an assumption that
the firm attempts to make a profit. Further, the assumption
of survival can, under some conditions, lead to profit
maximization.
The assumption of survival reveals similarities between
nonprofit organizations and for-profit organizations. It is
not hard to see some of the similarities. A not-for-profit
organization faces the same three constraints that a
for-profit organization does: supply curves for resources, a
production function, and some sort of demand curve for
output. For example, many art museums exist as nonprofit,
private organizations. They must buy resources (hire guards
and curators, pay utility bills, etc.), they produce a
product (a service of art exhibition), and they must obtain
money in order to continue in existence (donations and
entrance fees).
The major difference between the for-profit organization
and the nonprofit organization is that the former announces
that its goal is to make a profit, and then is forced by the
constraints to produce a product that is valuable to
someone. The latter announces that its goal is to produce a
product that is valuable to someone, and then is forced by
the constraints to cover its costs. But if an organization
covers its costs, its revenues must exceed costs, which
means it is making a profit.
One could imagine an art museum organized as a for-profit
corporation. One would expect it to charge an admission fee
that would maximize profits, and one expects this to be
higher than the fees a not-for-profit museum would charge. A
not-for-profit museum wants to encourage art enjoyment, and
higher fees interfere with this goal. But then why do
museums charge any fees at all? A zero fee would maximize
the number of visitors and art enjoyment (ignoring problems
of congestion). At one time few museums charged fees. Now,
most museums could not survive without fees.
Because both not-for-profit and for-profit organizations
face the same three constraints, the actions of one can be
hard to distinguish from those of the other if the
constraints allow only a small area of profit. As a result,
the economic theory of the firm describes, with a few minor
modifications, the options open to not-for-profit
organizations. (It is interesting that a for-profit museum
would be at a competitive disadvantage to a not-for-profit
museum because the not-for-profit status encourages
donations, an important source of revenue.)
Copyright
Robert Schenk
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