Baumol s sales revenue maximization

Hence, the managers are more interested in maximizing sales rather than profit. But the sales maximisation firm will produce OQ1 output where MR is zero. 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.

To find the equilibrium of the firm we need an additional tool, the iso-present-value curve. The long view, with S. A firm, he argues, may be willing to keep sales at a high level, even though they are unprofitable in the short run, in the hope that eventually in the long run the product will become profitable once established in the market.

Batey Blackman and E. A single-product model, with advertising: The anatomy of urban crisis",AER. Profit is the main means of financing growth of sales, and as such is an instrumental variable whose value is endogenously determined.

Such measures create dissatisfaction and uncertainty among personnel at all levels. When the sales maximiser spends more on advertising, his output will be more than that of the profit maximiser. Thus, by changing advertising we may generate a family of total-revenue curves, each representing the relationship of total revenue to output at different levels of advertising expenditure.

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

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.

Wilig, "Contestable Markets: If the sales of a firm are declining, banks, creditors and the capital market are not prepared to provide finance to it. 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.

But the oligopolistic firm wants its money sales to grow even though it earns minimum profits. Multiproduct model, with advertising: If we assume that the firm has a given amount of resources and given costs C and wants to allocate them among the various commodities it produces so as to maximise sales revenue, it will reach the same equilibrium solution as the profit maximiser, that is, it will produce the same quantities of the various products as if it were a profit maximiser.However, in Baumol’s model the firm is a sales maximiser, but it must also earn a minimum level of profit acceptable to shareholders and to those who finance its operations.

If the minimum acceptable level of profit is Π 1, the firm will produce the level of output X Sm which maximises its sales revenue. BAUMOL's Sales Revenue Maximization Model states that: It aims on the number of justifications for the sales revenue maximization objective as opposed to profit maximization.

The more important ones are: Management Priorities -Managers are more likely to be concerned with utility maximization on their part than profit maximization. The below mentioned article provides an overview on Baumol’s Sales or Revenue Maximisation.

Prof. Baumol in his book Business Behaviour, Value and Growth () has presented a managerial theory of the firm based on sales maximisation. The objective of maximising sales revenue rather than profits was developed by economist William Baumol whose work focused on the decisions of manager-controlled businesses.

Maximising total revenue - revision video His research found that annual salaries and perks were more closely linked to sales.

Sales Maximization Theory

Manager's salary and other benefits are largely linked with sales volumes, rather than profits. Baumol hypothesised that managers often attach their personal prestige to the company's revenue or sales; therefore they would rather attempt to maximise the firm's total revenue, instead of profits.

Baumol’s sales maximisation theory has some important implications which make it superior to the profit maximisation model of the firm. 1. The sales maximising firm prefers larger sales to profits.

Baumol’s Managerial Theory of Sales Revenue Maximization

Since it maximises its revenue when MR is zero, it will charge lower prices than that charged by the profit maximising firm. 2.

Baumol s sales revenue maximization
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