Managerial Economics August 15‚ 2007 The key points underpinning the economics of a profit maximizing firm Neoclassical model of the firm states that organization will have the main objective of maximizing its profit within a given period of time. Maximum profit was achieved at the output at which marginal cost is equal marginal revenue. There are several factors which need to be considered when talking about the profit maximizing firm: 1. The assumption of the profit maximizing firm is that
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Revenue and sales maximization Revenue maximization Maximizing sales revenue is an alternative to profit maximization and occurs when the marginal revenue‚ MR‚ from selling an extra unit is zero. The notion that business firms (especially those operating in the real world) are primarily motivated by the desire to achieve the greatest possible level of sales‚ rather than profit maximization. On a day-to-day basis‚ most real world firms probably do try to maximize sales rather than profit. For firms
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Sales Maximization A reasonable‚ and often pursued objective of firms is to maximize sales‚ that is‚ to sell as much output as possible. Clearly sales lead to revenue‚ meaning that maximizing sales is also bound to maximize revenue. But as the analysis of short-run production indicates‚ maximizing sales does NOT necessarily maximize profit. So why do firms do it? Are firms unreasonable? Are they irrational? Do they NOT understand the basic economic principles of short-run production? For some firms
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profit maximization has remained as one of the single most important objectives of the firm even today. Both small and large firms consistently make an attempt to maximize their profit by adopting novel techniques in business. Specific efforts have been made to maximize output and minimize production and other operating costs. Cost reduction‚ cost cutting and cost minimization has become the slogan of a modern firm. It is a very simple and unambiguous model. It is the single most ideal model that can
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Under the traditional economic understanding‚ it is always assumed that profit maximization is treated as the main goal or objective for businesses‚ subject to perfect knowledge‚ single entity and rational logic. However‚ as illustrated by the principal-agency problem‚ managers do not usually make rational decision entirely like owners who take company interest as their sole basis for their decisions. Past examples have shown that managers do take their own personal goals and satisfactions as consideration
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predictions of Baumol’s “Sales Maximisation Hypothesis?” In Neo-Classical Economic theory of a firm‚ the owners of a firm are involved in the day to day running of the firm‚ and therefore their main desire is profit maximisation. In reality firms are most likely run by managers and not by the owners. Because of this there is a lack of goal congruence between the two. Baumol (1959) suggests that manager controlled firms are more likely to have sales revenue maximisation as their main
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optimum cash balance under certainty. It is extensively used and highly useful for the purpose of cash management. As per the model‚ cash and inventory management problems are one and the same. William J. Baumol developed a model (The transactions Demand for Cash: An Inventory Theoretic Approach) which is usually used in Inventory management & cash management. Baumol model of cash management trades off between opportunity cost or carrying cost or holding cost & the transaction cost. As such firm
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In the context of the shareholder wealth-maximization model of a firm‚ what is the expected impact of each of the following events on the value of the firm? Explain why Shareholder wealth-maximazation model goals to maximize the present value of the expected future cash flow for the equity owner’s (shareholder). It is the long term business goal and the value for the firm is determined by the amount‚ timing‚ and risk of the firm’s expected future profits. For the following events‚ the value of
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to Baumol‚ every business firm aims at maximization it sales revenue (price x quantity0 rather than its profit. Hence his hypothesis has come to be known as sales maximization theory & revenue maximization theory. According to baumol‚ sales have become an end by themselves and accordingly sales maximization has become the ultimate objective of the firm. Hence‚ the management of a firm directs its energies in promoting and maximizing its sales revenue instead of profit. The goal of sales maximization
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The main sources of revenue in a hotel are through sales in rooms‚ restaurants and bars. Identify and evaluate other possible sources of revenue. ‘One of the fundamental business concepts is that a company is in business to make money’ (Hales‚ 15:2005). Revenue is the monetary amount that customers pay to receive a product or service and is the first aspect considered when conducting financial analysis as it starts the cash flow process of a company (Hales and Van Hoof‚ 2010). Moyer et al (1995)
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