Page 323 - DECO401_MICROECONOMIC_THEORY_ENGLISH

Microeconomic Theory

Notes
Fig. 19.4

TC
TR/TC/Profit E L TR

M B P
S
C
O Q DK Output
TP

The oligopolistic Baumol model describes that the maximum profit production OQ will low by maximum
sale production OD and price will high. The reason behind the price is low in sales maximization is that
the total production and the total revenue are on high, while in profit maximization; total production is
lower than total revenue. Suppose that in figure QB is jointed by a line TR. According to Baumol, “If on
the point of minimum profit, firm gets more profit than essential minimum, then the profit maximization
firm will get profit by lower their price and increase in physical production.”
Model with Advertising—Further Baumol has indicated that the profit constraint is effective in sales
maximization and increases the revenue of firm. The expenditure in advertisement is in vertical axis and
total revenue, cost and profit are in horizontal axis in Fig. 19.5. TR is total revenue curve. 45° line ADC is
advertisement cost curve. By collecting in ADC curve, as equal to OC a fixed amount other cost; we get the total
profit curve TP which is the difference between TR and TC curve. MP is minimum profit constrain line. Profit
maximization firm will expend OQ in advertisement and its total revenue will be OS (= QA). On the other
hand, on given profit constrain MP, sales maximization firm will expend OD in advertisement and the total
revenue OT (= DE) will earn. Thus, the sales maximization firm expends more in advertisement than profit
maximization firm (OD > OQ) and earn more revenue (DE > QA) on profit constrain level MP. So the sales
maximization firm will get profit by increasing the advertisement cost until the profit constrain prevents it.

According to Baumol, sale maximization means maximization of total revenue.

Fig. 19.5

TC
E TR
T
Adc
TR/Cost/Profit
S
A

C
M P
45°
O
Q D
TP
Advertising Outlay

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