Sales maximisation baumol 1959

Such a family of total-cost curves is shown in figure The Multi period Model: We assume that the sales revenue R grows at a rate of growth g per cent. II is the constant endeavour of the managers to maximize the sales of the firm after attaining a given level of profit.

baumols theory of sales revenue maximisation slideshare

According to Baumol, with the separation of ownership and control in modem corporations, managers seek prestige and higher salaries by trying to expand company sales even at the expense of profits.

Similar is the case with points D and E on the constraint line R where E with higher sales will be preferred to D.

baumols sales maximisation model pdf

More Availability of Loans: At the time of sanctioning loan to a firm, financial institutions mainly consider its sales. Thus it will always pay the sales maximiser to increase his advertising outlay until he is stopped by the profit constraint.

Given that g is financed mainly or totally by the internal profits one might ask whether sales maximisation makes sense as the goal of the firm in a multi period analysis.

explain baumols sales revenue maximization model

Baumol suggests that manager controlled firms are more likely to have sales revenue maximisation as their main goals rather than profit maximisation favoured by shareholders.

During this period the firm attempts to maximise its total sales revenue not physical volume of output subject to a profit constraint. The findings showed positive significant correlations between sales revenues and profits.

Baumols theory of sales revenue maximisation wikipedia

This is the traditional means for the modern day manager to increase shareholder wealth. From the above assumptions the following inferences can be drawn. In the dynamic model the time-horizon is extended and the profit constraint is endogenously determined. To prove this it suffices to show that the marginal revenues of the products are positive at the equilibrium solution, that is This model can be extended to cover simultaneous changes in advertising and in output when surplus profits are earned. It is so because success of a firm is generally judged from its total sales. Main aim of a firm is to maximise sales. Recall that according to all versions of limit-pricing, a general increase in costs, or the imposition of a tax that affects all firms in the industry in the same way, will induce firms to increase their prices, because they know that everyone will follow the same policy and thus there is no danger of losing market share. The sales maximising firm prefers larger sales to profits. In the short run when output cannot be increased, revenue can be increased by raising the price. Even with falling costs the two goals are complementary over some scales of output but become competing beyond a certain level of output. Why then sacrifice current profits in favour of increased current sales? This is explained in Figure 7. How to cite this page Choose cite format:. This evidence supports Baumols claim that managers have strong reason to pursue expansion of sales rather than increase profits. The new element in this model is the introduction of advertising as a major instrument policy variable of the firm.

This argument cannot be accepted without any empirical evidence to support it. But he claims that this assumption is simplifying and can be relaxed without substantially altering the analysis.

Sales maximisation baumol 1959

That is, the equilibrium of a sales maximiser is defined by a point of tangency of the isorevenue and the isoprofit curves; it will be a point on the curve Rabcde. This evidence is interpreted as refuting the sales-maximisation hypothesis. So long as the fixed costs do not vary with the level of output and provided that the increase in TFC does not lead the firm to close down altogether the change in the TFC will not lead the profit maximiser to change his price and output in the short run. Rosenberg has criticised the use of the profit constant for sales maximisation by Baumol. But the oligopolistic firm wants its money sales to grow even though it earns minimum profits. Baumol does not establish the relationship between the firm and industry. If the firm is a profit maximiser the imposition of the lump-sum tax will not affect the price and output in the short run the profit maximiser will bear the whole burden of the lump-tax. Consequently, employer-employee relations become more cordial. While studying this theory.
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Baumol's Sales or Revenue Maximisation Theory: Assumptions, Explanation and Criticisms