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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Similarly, if the minimum acceptable profit is n 2the sales-maximising solution is b on curve R 4. When the sales maximiser spends more on advertising, his output will be more than that of the profit maximiser. During this period the firm attempts to maximise its total sales revenue not physical volume of output subject to a profit constraint.
Beyond that point, however, current sales revenue continues to increase but the rate of growth declines. The firm attempts to maximise the present value of the stream of sales revenue over its lifetime, by choosing appropriate values for the current initial level of sales revenue R and its growth rate g.
Suppose the minimum profit level of the firm is represented by the line MP. For simplicity we may actually assume that growth will be entirely financed by profits. This evidence was interpreted as refuting the sales-maximisation hypothesis.
Under our assumptions the iso-present-value curves will be downward-sloping and will be parallel to one another. Their findings showed positive significant correlations between sales revenue and profits.
modell Such a family of total-revenue curves is shown in figure It involves the tools of the product transformation curve and of isorevenue curves. It does not imply the sale of large quantities of output, but refers to the increase in money sales in rupee, dollar, etc.
By sales maximisation, Baumol means maximisation of total revenue.
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 Given i which is exogenously determinedthe simplest relationship that can be postulated between these variables is of a linear form. However, in the Haveman-DeBartolo generalized model this prediction may not be true. This sales maximisation output OK is higher than the profit maximisation output OQ.
So both the rrevenue maximiser and the profit maximiser would not be producing different levels of output. Ervenue can increase upto the point of profit maximisation where the marginal cost equals marginal revenue.
The new element in this model is the introduction of advertising as a major instrument policy variable of the firm.
This condition states that the marginal revenue of advertising commodity i must be equal to the marginal revenue of advertising commodity j. The theory ignores not only actual competition, but also the threat of potential competition.
Baumol’s Sales or Revenue Maximisation Theory: Assumptions, Explanation and Criticisms
However, the desire for steady performance has a stabilizing effect on economic activity. This curve shows all combinations of g and R that yield the same S. 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.
If they realize maximum high profits in one period, they might find themselves in trouble in other periods when profits are less than maximum. However, even in these cases the correlations between profits and sales were mostly positive. Baumol does not establish the relationship between the firm and industry. Declining sales, on the other hand, will make necessary the reduction of salaries and other payments and perhaps the lay-off of some employees.
The isorevenue curve is drawn convex to the origin, implying a falling demand curve for the two products, and hence a declining marginal revenue for additional units sold.
Despite these criticisms, there is no denying the fact that sales maximisation forms an important goal of firms modle the present day business world. However, the above reasons do not imply that businessmen are completely indifferent to actions of competitors.
The curve 0aA depicts the attainable growth rate g for any given value of current sales revenue R. Profits also will be higher for the profit maximiser.
Baumol’s Sales Revenue Maximization Model
Salaries of workers and management also depend to a large extent on more sales and the firm gives them bonus and other facilities. Sales Maximisation Model of Oligopoly — Explained!
However, such data are not disclosed by firms to researchers, and are commonly unknown to the firms. This business practice, Baumol argues, provides evidence in support of his theory.
Baumol’s Managerial Theory of Sales Revenue Maximization
It depends on the responsiveness of demand to advertising rather than price cuts. That is, Baumol accepts that cost curves are U-shaped and the demand curve of the firm is downward-sloping. But the aim of the firm is to maximise its sales rather than profits. This, however, is a simplifying assumption which may be relaxed in a more general analysis. 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.
Such measures create dissatisfaction and uncertainty among personnel at all levels. 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. The model presented by Baumol treats explicitly advertising, but other forms of non-price competition product change, service, quality, etc. In the case of multiproducts, Baumol has argued that revenue and profit maximisation yield the same results.
The top managers become to a certain extent risk- avoiders, and this attitude may act as a curb on economic growth.