Evaluation of Baumol's Model
Introduction
Generally in business, there is a trade-off between selling many units at a low price and selling only a few units at a high price. There are different managerial models in a firm embodying different assumptions like the Profit Maximization Model which is a traditional model, the Marris Model, the Williamson Model and the Baumol Model.
This write-up will focus on understanding management preferences in terms of price, revenue and profit maximization, critically evaluate the management model of Baumol and review the extent to which the Baumol model provides a more useful insight into pricing and output decisions of modern management.
In conclusion, how low cost airlines apply the Baumol model in terms of pricing will be discussed.
Prices, Total Revenue and Profit Maximization
To understand management preferences, we have to realize that profit maximization is the objective of all companies. Without profit, a company can die off in no time. Management has an indifference relationship which is a trade-off of profits today for more profit tomorrow while some others focus on revenue maximization today.
For most organizations with a concentration of ownership and control within the hands of the small entrepreneur, there was considered to be more of a need for profits to be maximised.
The profit maximizing firm embraces a model that is holistic because the firm is seen as an entity that can have objectives of its own take decisions. This is in marked contrast to the ‘behavioral’ model of the firm where it is argued that ‘only people can have objectives, organizations cannot’.
Profit maximization may also be justified if it leads to correct predictions about firm behaviour. That is managers
Generally in business, there is a trade-off between selling many units at a low price and selling only a few units at a high price. There are different managerial models in a firm embodying different assumptions like the Profit Maximization Model which is a traditional model, the Marris Model, the Williamson Model and the Baumol Model.
This write-up will focus on understanding management preferences in terms of price, revenue and profit maximization, critically evaluate the management model of Baumol and review the extent to which the Baumol model provides a more useful insight into pricing and output decisions of modern management.
In conclusion, how low cost airlines apply the Baumol model in terms of pricing will be discussed.
Prices, Total Revenue and Profit Maximization
To understand management preferences, we have to realize that profit maximization is the objective of all companies. Without profit, a company can die off in no time. Management has an indifference relationship which is a trade-off of profits today for more profit tomorrow while some others focus on revenue maximization today.
For most organizations with a concentration of ownership and control within the hands of the small entrepreneur, there was considered to be more of a need for profits to be maximised.
The profit maximizing firm embraces a model that is holistic because the firm is seen as an entity that can have objectives of its own take decisions. This is in marked contrast to the ‘behavioral’ model of the firm where it is argued that ‘only people can have objectives, organizations cannot’.
Profit maximization may also be justified if it leads to correct predictions about firm behaviour. That is managers
References: 1. Patrick A. McNutt, Signalling, Strategy & Management Type 2. Cook M. and Farquharson C., (1998) Business Economics; First edition 3. Michael R. Baye, Managerial Economics and Business Strategy 4. www.easyjet.com. Easyjet Plc Annual Report & Financial Statements for the year ended 30 September, 2008 Easyjet Analyst and Investor Day.