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BAUMOL SALES REVENUE MAXIMIZATION MODEL PDF

Baumol’s theory of sales revenue maximization was created by American economist William Jack Baumol. It’s based on the theory that, once a. W. J. Baumol suggested sales revenue maximisation as an alternative goal to profit maximisation.1He presented two basic models: the first is a static. W. J. Baumol suggested sales revenue maximisation as an alternative goal to profit maximisation.1 He presented two basic models: the first is a static.

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We will develop this model using calculus so as to achieve maximum generality. The firm must realize a minimum level of profits to keep shareholders happy and avoid a fall of the prices of shares on the stock exchange. Thus he says that the sales-maximisation hypothesis has a maxmiization predictive performance than the traditional profit-maximisation hypothesis.

There is nothing startling about this, since in both models we assume given resources and costs.

Baumol’s Managerial Theory of Sales Revenue Maximization

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. But sales maximisation is regarded as the short-run and long-run goal of the management. This condition states that the marginal revenue of advertising commodity i must be abumol to the marginal revenue of advertising commodity j.

The growth function is. But then production costs will increase, since MC is always positive. The firm aims at maximising its total sales revenue in the long run subject to a profit constraint. Baumol, Business Behaviour, Value and Growth. But the oligopolistic firm wants its money sales to grow even though it earns minimum profits. This argument cannot be accepted without any empirical evidence to support it.

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Baumol’s Sales or Revenue Maximisation Theory: Assumptions, Explanation and Criticisms

Thus the firm should choose as large as possible values of R and g. Even with falling costs the two goals are complementary over some scales of output but become competing beyond a certain level of output. So both the sales maximiser and the profit maximiser would not be producing different levels of output. This conclusion holds for firms producing only one product, or one group of products. The formal condition of equilibrium of a sales-maximising multiproduct firm may be stated as follows: Among all possible values the firm will choose the pair of values of g and R that maximise the present value of the future stream of sales S.

The sales maximiser would spend more on advertising in order to earn larger revenue than the profit maximiser subject to the minimum profit constraint. The model ignores not only actual competition, but also the threat of potential competition from rival oligopolistic firms.

For sales maximisation, the firm should produce that level of output which not only covers the minimum profits but also gives the highest total revenue consistent with it. A firm in abumol oligopolistic market will prefer to increase its sales by advertising rather than by a cut in price.

Salaries of workers and management also depend to a large extent on more sales and the firm gives them bonus and other facilities. The maximuzation maximiser sells at a price lower than the profit maximiser. In this case the misallocation of resources if measured as a departure of P from MC will be greater for the sales maximiser.

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Consequently the highest attainable growth rate g will be at the point of maximum profits. We subsequently substitute the X i S into the demand functions of the individual products which are assumed known and obtain the prices.

Baumol’s Sales or Revenue Maximisation Theory: Assumptions, Explanation and Criticisms

According to Shepherd, under oligopoly a firm faces a kinked demand curve and if the kink is large enough, total revenue and profits would be the maximum at the same level of output.

The employees at all levels can be given higher earnings and better terms of work in general. The levying of a lump-sum tax will have similar results: 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.

In particular Baumol does not examine explicitly the interrelationship between advertising, price, cost of production and level of output. 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 A firm attaches great importance to the magnitude of sales and is much concerned about declining sales. With an accentuated kink, if demand shifts, advertising and output will increase, while price will remain unchanged, ceteris paribus, at the level of the kink.