Page 322 - DECO401_MICROECONOMIC_THEORY_ENGLISH

Unit-19: Behavioural and Managerial Theories of the Firm

the managers want high salary and designation on the cost of sales maximization on profit cost. As Notes
a consultant of various firms, Baumol has seen that when he asked various managers about the last
year business then they always replied, “Our sale has increased by three million dollar.” Some other
managers replied they, “May God increase their sales.” They do not talk on their profits. So according
to Baumol, the revenue or sales maximization and not profit maximization does match with firm’s
behaviour. But the purpose of management is sales maximization for short and long run. He gives many
proofs to support his theory. According to him, a firm gives more important to its shape of sales and
thinks more if sales get low. If the sales of firm get low then the bank, lender and capital market do not
ready to give fund. Its own stockist and businessman do not take interest on it and consumer also does
not want to buy their product because it is getting in lost. But if the sale of firm is high then shape of firm
is also increased means it gets profit more.
Model with Single Product—The sales maximization means maximized total revenue as per
Baumol. It does not mean increasing of sale of quantity product but increase in monetary sales
(like Rupees , Dollar etc). The sale can go to profit maximization where marginal cost and marginal
revenue are same. But if it increases from this point, then the profit remains same and monetary
income increases. But the oligopolistic firms want that it monetary income should increase even
its profit is minimum. The minimum profit depends by the necessity of sales maximization and to
continue profit of sales. It is essential to invest monetary money in future. According to Baumol,
“Maximum revenue will only get on the production where the elasticity of demand is equal to
units means the marginal revenue is zero which is the condition for profit maximization in equal
marginal revenue.” It has shown in Fig. 19.3 where profit maximization firm produces OQ quantity
which MC and MR curve meet on point P but sales maximization firm will produce the quantity
where MR curve is zero.

Fig. 19.3

MC
P
Price and Cost E MR P 1

O Q Q
1
Quantity

The Baumol model is shown in Fig. 19.4 where TC is total cost curve, TR is total revenue curve,
TP is total profit curve and MP is minimum profit or profit constraint line. Firm gets its profit
maximization of production on OQ level of TP curve’s highest point B. The purpose of product
firm is sales maximization and not profit maximization. Its sales maximum production is OK where
total revenue KL is maximum on the highest point of TR curve. Sales maximization is subject to
minimum profit constraints. Suppose that minimum profit level is shown by MP line. DE will not
maximize the production sale because the minimum profit OM is not done by total profit KS. It is
the level of OD production, where minimum profit DC (= OM) is according to the price DE/OD of
total revenue DE.

LOVELY PROFESSIONAL UNIVERSITY 315