Baumols sales maximisation hypothesis essay
This evidence supports baumols presumption that sales maximisation is better related than profit, to executive rewards and corporate performance.
Sales maximization model of oligopoly
Profit maximisation Profit maximisation is the process by which a firm determines the price and output level that returns the greatest profit. R refers to the profit constraint. Agency theory explains that shareholders and managers have a relationship which is crucial to the modern firm. The important point to note here is that there is no possibility of an unconstrained sales maximisation. Economics Theories. He stressed that in competitive markets, firms would rather aim at maximising revenue, through maximisation of sales. Its total cost and revenue curves are also of the conventional type. Consequently, employer-employee relations become more cordial. However, as pointed out by various academics Baumol, ; Marris, ; Williamson, , profit maximization does not always serve as the only correct objective for a firm, especially at various phrases of the business on a timeline scale. Minimum profits are required either in the form of retained earnings or new capital from the market. This is shown in Fig.
If sales are increased beyond this point money sales may increase at the expense of profits. This evidence supports Baumols claim that managers have strong reason to pursue expansion of sales rather than increase profits. All these features are indicative of the progress of the firm.
While studying this theory. K must be kept in view that firms do not Ignore profit altogether. Suppose the minimum profit level of the firm is represented by the line MP. Since there is only one firm operating in the market, the demand curve is therefore the industry demand curve.
Baumols theory of sales maximization
They also endorse this goal of the firms. Profit maximisation is also a characteristic of a monopoly. In order to stay in operation, colleges have been left with no option, but to raise their tuition fees as a way of covering the funding shortfall. Now if, for example, the minimum required profit level is OP1, then the sales-maximising output OQs will provide plenty of profit and that is the amount it will pay the sales maximiser to produce. As a result, consumers' welfare is promoted. Through globalisation, aspects involving profit maximisation and business reputation have become the primary influences of the ST. While studying this theory. So both the sales maximiser and the profit maximiser would not be producing different levels of output.
Arguments in favour of Maximisation of Sales Goal Following arguments are given in favour of maximisation of sales goal: i. James Murdoch speech.
If the sales of a firm are declining, banks, creditors and the capital market are not prepared to provide finance to it. The model does not show how equilibrium in an industry, in which all firms are sales maximisers, will be attained. The profit and sales-maximising outputs are, respectively, OQp and OQs.
Similar is the case with points D and E on the constraint line R where E with higher sales will be preferred to D.
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