If sales are increased beyond this point, money sales may increase at the expense of profits. If in any particular case, the return in the long-run is not satisfactory, then the deficiency should be corrected or the activity be abandoned for a more favourable one.
Unlike a price reduction, increased advertising always increases sales revenue. The total-revenue curve shifts upwards as advertising is increased. Whether this maximum sales revenue will be realized or not depends on the level of the minimum acceptable level of profit which may act as a constraint to the activity of the firm.
Thus, Peston concludes, if firms are observed to sell too large an output, this does not show their preference for sales over profits, but may well be attributed to ignorance of demand conditions and the eagerness of firms to exploit technological changes which reduce costs at higher scales of output.
The net present value of a course of action is the difference between the present value of its benefits and present value of its costs. An increase in variable costs will lead the sales maximiser to an increase in price and a reduction in output.
The Assumptions of the Model: Such behaviour is common for new products, for which the firm expects no profits or even losses at the initial stage of their introduction.
Often the objective is tied to survival, security or the maintenance of liquid assets. Baumol recognizes that this is an unrealistic assumption, since with advertising the physical volume of output increases and the firm might move to a cost structure where production cost is different increasing or decreasing.
Surely by maximizing profits the firm could finance a higher rate of growth. Each of these objectives is complementary to profit, in that the maximization of profit may ensure the attainment of that objective.
It is assumed that: Both the sales maximiser and the profit maximiser will raise their price and reduce their output.
This curve shows all combinations of g and R that yield the same S. The Assumptions of the Dynamic Model: In any case advertising cannot be less in a sales-maximising model. Assume that the cost and revenue curves are as shown in figure Relationship The thought that maximizing sales will help maximize profits is not always true.
Wealth maximization means maximizing the net present value or wealth of a course of action. TR is the total revenue curve.
However, even in these cases the correlations between profits and sales were mostly positive. But the total revenue at output ON is much less than at output OB. Firm reduces its managerial and other staff with fall in sales.
The isorevenue curve has a slope equal to the ratio of the marginal revenues of the two commodities: Clearly the further away from the origin an iso-present-value curve lies, the higher the discounted stream of revenues it depicts.
Now, given the price of product, the total revenue i. This attitude towards competitors attributed by Baumol to several reasons: Shepherd has suggested that if the demand curve has a steep kink, so that to the right of the kink the MR is negative figure When the sales maximiser spends more on advertising, his output will be more than that of the profit maximiser.
An example would be a scheduled airline flight. That is, the firm will not reach point R on figure In the short run, a change in fixed costs has no effect on the profit maximizing output or price. This would ensure that output neither fluctuated widely nor fell below some previously determined minimum acceptable level.
In the short run when output cannot be increased, revenue can be increased by raising the price. Assumptions, Explanation and Criticisms! This is because corresponding to OA output, the highest point of TP curve lies.
But, as we have seen above, according to Prof. As such, in return for the privileges and rights granted to it by the state, the business firm should be made increasingly responsible for social objectives.
For example, the marginal revenue curve would have a negative gradient, because it would be based on the downward-sloping market demand curve.
If the industry is perfectly competitive as is assumed in the diagramthe firm faces a demand curve D that is identical to its marginal revenue curve MRand this is a horizontal line at a price determined by industry supply and demand.
This theory leads to the conclusion that a sales-revenue maximisation firm: However, this is inconsistent with what Baumol states elsewhere p.Assuming that the firm’s costs remain the same, a firm will choose a lower price and supply a higher output when sales revenue maximisation is the main objective.
The profit maximising price is P1 at output Q1, the revenue maximising price is P2 at output Q2. Jun 30, · Profit maximization offers the advantage of increased earnings, but it also increases your risk of losing money.
When you focus first and foremost on profit, you may lose sight of other objectives. Baumol’s Sales or Revenue Maximisation Theory: Assumptions, Explanation and Criticisms!
Prof Baumol in his article on the theory of Oligopoly presented a managerial theory of the firm based on the sales maximisation. 3. The firm’s minimum profit constraint is set competitively in terms of the.
Sales maximisation is another possible goal and occurs when the firm sells as much as possible without making a loss. In the example of the tennis racket manufacturer, the price necessary to maximise sales volume, without making a loss is a price of £30 per racket, where it sells 80 rackets.
ADVERTISEMENTS: Sales maximisation model of oligopoly is another important alternative to profit maximization model. This has been propounded by W.J. Baumol, an American mi-centre.com maximisation was quite consistent with rationality assumption about business behaviour.
It may also be noted that sales maximisation model. Sales Maximization As An Objective Of A Firm A. FIRM AND ITS OBJECTIVE: Conventional theory of firm assumes profit maximization is the sole objective of business firms.
But recent researches on this issue reveal that .Download