Page 321 - DECO401_MICROECONOMIC_THEORY_ENGLISH

Microeconomic Theory

Notes 6. For growth of firm, managers need to get more reciation profit for .................... more funds.
(a) expend (b) invest (c) exchange (d) none of these

Its Criticism

The growth maximization mode of Marris has been criticized by Koutsoyiannis and Hawkins due to
its following assumptions—
1. Marris proposed the price structure of firm. So he does not explain that how prices are determined
in market. It is a big demerit of this model.
2. The another main demerit of this model is it does not accept the correlation between oligopoly firms
in non-collusive markets.
3. This model does not explain the dependency of non-price competition.
4. Model is based on that assumption that firms can grow easily by creating new products. This is
unreal because no firm can sell anything to consumer. The consumer wants a unique brand which
can change with the new product.
5. According to Koutsoyiannis, the model of Marris basically applies on those firms which produce
consumer goods. This model does not explain the exchange industry or business of businessmen.
6. Marris has collected the expenditure of advertisement and R&D in his model. It is another demrit
of this model because these units are not same in a given period of time.
7. Marris assumes that firms have its own R&D department on which they expend more to get a new
product. But in fact, most of the firms have no R&D departments. They follow the notion of other
firms for product diversification and give royalty to develop models.
8. The assumption that all units like profit, selling and cost increase in a same rate is excess.
9. The assumption is that firm will grow in a fixed rate. The firms grow in a fixed rate but later slowly.
10. It is impossible to decide that point which makes the market value of share of firms as maximum
and firm can overtake by another.

19.2 Baumol’s Sales Maximization Model

Prof. Baumol has proposed administrative theory of firm in his book Business Behaviour, Value and
Growth (1967) on the basis of sales maximization. He described two models of sales maximization – One
static model and second dynamic. We would discuss only the static model with single product without
advertisement, with advertisement and various product models.

Its Assumptions

This model is based on following assumptions:
1. Firm has a period of time.
2. Firm wants to get more to its total selling revenue in long run which is fixed with its profit constraints.
3. The minimum profit balance of firm is fixed competitively with the price of its share in market.
4. The firm is oligopolistic which cost curve is U-shaped and the slope of demand curve is downward.
The total cost curve and revenue curve are traditional.

The Model

To check the oligopolistic firms in America, Baumol has found that they follow the purpose of sales
maximization. According to Baumol, in modern firms even the management and owner are divided,

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