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4. 4. MB0042output and sales. We may show total revenue as a function of the total quantity sold at a given price as below. TR = f (q). It implies that higher the sales, larger would be the TR and vice-versa. TR is calculated by multiplyingthe quantity sold by its price. Thus, TR = PXQ. For e.g. a firm sells 5000 units of a commodity at the rate of Rs. 5per unit, then TR would be2. Average revenue (AR)Average revenue is the revenue per unit of the commodity sold. It can be obtained by dividing the TR by thenumber of units sold. Then, AR = TR/Q AR = 150/15= 10.When different units of a commodity are sold at the same price, in the market, average revenue equals price at whichthe commodity is sold for e.g. 2 units are sold at the rate of Rs.10 per unit, then total revenue would be Rs. 20(2×10). Thus AR = TR/Q 20/2 = 10. Thus average revenue means price. Since the demand curve shows therelationship between price and the quantity demanded, it also represents the average revenue or price at which thevarious amounts of a commodity are sold, because the price offered by the buyer is the revenue from seller‘s pointof view. Therefore, average revenue curve of the firm is the same as demand curve of the consumer.Therefore, in economics we use AR and price as synonymous except in the context of price discrimination by theseller. Mathematically P = AR.3. Marginal Revenue (MR)Marginal revenue is the net increase in total revenue realized from selling one more unit of a product. It is theadditional revenue earned by selling an additional unit of output by the seller.MR differs from the price of the product because it takes into account the effect of changes in price. For example if afirm can sell 10 units at Rs.20 each or 11 units at Rs.19 each, then the marginal revenue from the eleventh unit is (10× 20) - (11 × 19) = Rs.9.Relationship between Total revenue, Average revenue and Marginal Revenue conceptsIn order to understandthe relationship between TR, AR and MR, we can prepare a hypothetical revenue schedule.From the table, it is clear that:MR falls as more units are sold.TR increases as more units are sold but at a diminishing rate.TR is the highest when MR is zeroTR falls when MR become negativeAR and MR both falls, but fall in MR is greater than AR i.e., MR falls more steeply than AR.Relationship between AR and MR and the nature of AR and MR curves under difference market conditions1. under Perfect Market:Under perfect competition, an individual firm by its own action cannot influence themarket price. The market price is determined by the interaction between demand and supply forces. A firm can sellany amount of goods at the existing market prices. Hence, the TR of the firm would increase proportionately with
5. 5. MB0042the output offered for sale. When the total revenue increases in direct proportion to the sale of output, the AR wouldremain constant. Since the market price of it is constant without any variation due to changes in the units sold by theindividual firm, the extra output would fetch proportionate increase in the revenue. Hence, MR & AR will be equalto each other and remain constant. This will be equal to priceUnder perfect market condition, the AR curve will be a horizontal straight line and parallel to OX axis. This isbecause a firm has to sell its product at the constant existing market price. The MR cure also coincides with the ARcurve. This is because additional units are sold at the same constant price in the market.2. under Imperfect Market:Under all forms of imperfect markets, the relation between TR, AR, and MR isdifferent. This can be understood with the help of the following imaginary revenue schedule.From the above table it is clear that:In order to increase the sales, a firm is reducing its price, hence AR fallsAs a result of fall in price, TR increase but at a diminishing rateTR will be higher when MR is zeroTR falls when MR becomes negativeFrom the above table it is clear that:In order to increase the sales, a firm is reducing its price, hence AR falls.As a result of fall in price, TR increase but at a diminishing rate.TR will be higher when MR is zeroTR falls when MR becomes negativeAR and MR both declines. But fall in MR will be greater than the fall in AR.
6. 6. MB0042The relationship between AR and MR curves is determined by the elasticity of demand on theaverage revenue curve.Under imperfect market, the AR curve of an individual firm slope downwards from left to right. Thisis because; a firm can sell larger quantities only when it reduces the price. Hence, AR curve has a negativeslope.The MR curve is similar to that of the AR curve. But MR is less than AR. AR and MR curves are different.Generally MR curve lies below the AR curve.The AR curve of the firm or the seller and the demand curve of the buyer is the sameSince, the demand curve represents graphically the quantities demanded by the buyers at various prices it shows theAR at which the various amounts of the goods that are sold by the seller. This is because the price paid by the buyeris the revenue for the seller (One man‘s expenditure is another man‘s income). Hence, the AR curve of the firm isthe same thing as that of the demand curve of the consumers.Suppose, a consumer buys 10 units of a product when the price per unit is Rs.5 per unit.Hence, the total expenditure is 10 x 5 = Rs.50/-. The seller is selling 10 units at the rate of Rs.5 per unit. Hence, histotal income is 10 x 5 = Rs.50/-. Thus, it is clear that AR curve and demand curve is really one and the same.Q1. Distinguish between a firm and an industry. Explain the equilibrium of a firm and industry under perfectcompetition. Distinguish between a firm and an industryAn industry is the name given to a certain type of manufacturing or retailing environment. For example, the retailindustry is the industry that involves everything from clothes to computers, anything in the shops that get sold to thepublic. The retail industry is very vast and has many sub divisions, such as electrical and cosmetics. Morespecialized industries deal with a specific thing. The steel industry is a more specialized industry, dealing with themaking of steel and selling it on to buyers.The difference between this and a firm is that a firm is the company that operates within the industry to create theproduct. The firm might be a factory, or the chain of stores that sells the clothes, within its industry. For example,one firm that makes steel might be Aveda steel. They create the steel in that firm for the steel industry. A firm isusually a corporate company that controls a number of chains in the industry it is operating within.For example in retail, the firm Arcadia stores own the clothing chains Top shop, Dorothy Perkins, Miss Selfridge,and Evans. These all operate for the firm Arcadia within the industry of retail.
7. 7. MB0042Several firms can operate in one industry to ensure that there is always competition to keep prices reasonable andstop the market becoming a monopoly, which is where one firm is in charge of the whole industry. Sometimes, afirm is not necessary within the industry and independent chains and retailers can enter straight into the marketwithout a firm behind them, although this is risky. This is because one of the advantages of having a firm behind youis that it is a safeguard against possible bankruptcy because the firm can support the chain that it owns.The equilibrium of a firm and industry under perfect competitionAccording to Miller, ―Firm is an organization that buys and hires resources and sells goods and services‖. Lipseyhas defined as ―firm is the unit that employs factors of production to produce commodities that it sells to other firms,to households, or to the government. Industry is a group of firms producing standardized products in a market.According to Lipsey, ―Industry is a group of firms that sells a well defined product or closely related set ofproducts.‖Conditions of Equilibrium of the Firm and IndustryA firm is in equilibrium when it has no propensity to modify its level of productivity. It requires neither extensionnor retrenchment. It wants to earn maximum profits in by equating its marginal cost with its marginal revenue, i.e.MC = MR. Diagrammatically, the conditions of equilibrium of the firm are(1) the MC curve must equal the MR curve.This is the first order and essential condition. But this is not a sufficient condition which may be fulfilled yet thefirm may not be in equilibrium.(2) The MC curve must cut the MR curve from below and after the point of equilibrium it must be above the MR.This is the second order condition. Under conditions of perfect competition, the MR curve of a firm overlaps withthe AR curve. The MR curve is parallel to the X axis. Hence the firm is in equilibrium when MC = MR = AR.The first order figure (1), the MC curve cuts the MR curve first at point X. It contends the condition of MC = MR,but it is not a point of maximum profits for the reason that after point X, the MC curve is beneath the MR curve. Itdoes not pay the firm to produce the minimum output OM when it can earn huge profits by producing beyond OM.Point Y is of maximum profits where both the situations are fulfilled.Amidst points X and Y it pays the firm to enlarges its productivity for the reason that it‘s MR > MC. It willnevertheless stop additional production when it reaches the OM1 level of productivity where the firm fulfils both thecircumstances of equilibrium. If it has any plants to produce more than OM1 it will be incurring losses, for itsmarginal cost exceeds its marginal revenue beyond the equilibrium point Y. The same finale hold good in the caseof straight line MC curve and it is presented in the figure.
8. 8. MB0042 An industry is in equilibrium, first when there is no propensity for the firms either to leave or either the industry andnext, when each firm is also in equilibrium. The first clause entails that the average cost curves overlap with theaverage revenue curves of all the firms in the industry.They are earning only normal profits, which are believed to be incorporated in the average cost curves of the firms.The second condition entails the equality of MC and MR. Under a perfectly competitive industry these twocircumstances must be fulfilled at the point of equilibrium i.e. MC = MR….(1), AC = AR…. (2), AR = MR.Hence MC = AC = AR. Such a position represents full equilibrium of the industry.Short Run Equilibrium of the Firm and IndustryShort Run Equilibrium of the FirmA firm is in equilibrium in the short run when it has no propensity to enlarge or contract its productivity and needs toearn maximum profit or to incur minimum losses.The short run is an epoch of time in which the firm can vary its productivity by changing the erratic factors ofproduction. The number of firms in the industry is fixed since neither the existing firms can leave nor new firms canenter it.Postulations All firms use standardised factors of production Firms are of diverse competence Cost curves of firms are dissimilar from each other All firms sell their produces at the equal price ascertained by demand and supply of the industry so that the price of each firm, P (Price) = AR = MR Firms produce and sell various volumes The short run equilibrium of the firm can be described with the helps of marginal study and total cost revenue study.Marginal Cost, Marginal Revenue analysis – During the short run, a firm will produce only its price equals averagevariable cost or is higher than the average variable cost (AVC). Furthermore, if the price is more than the averagestotal costs, ATC, i.e. P = AR > ATC the firm will be earning super normal profits. If price equals the average totalcosts, i.e. P = AR = ATC the firm will be earning normal profits or break even.If price equals AVC, the firm will be incurring losses. If price drops even a little below AVC, the firm will shutdown since in order to produce it must cover atleast it‘s AVC through short run. So during the short run, underperfect competition, affirm is in equilibrium in all the above mentioned stipulations.Super normal profits – The firm will be earning super normal profits in the short run when price is higher than theshort run average cost.Normal Profits = The firm may earn normal profits when price equals the short run average costs.Total Cost – Total Revenue Analysis – The short run equilibrium of the firm can also be represented with the help oftotal cost and total revenue curves. The firm is able to maximise its profits when the positive discrimination betweenTR and TC is the greatest.
9. 9. MB0042 Short Run Equilibrium of the IndustryAn industry is in equilibrium in the short run when its total output remains steady there being no propensity toenlarge or contract its productivity. If all firms are in equilibrium the industry is also in equilibrium. For fullequilibrium of the industry in the short run all firms must be earning normal profits.But full equilibrium of the industry is by sheer accident for the reason that in the short rum some firms may beearning super normal profits and some losses. Even then the industry is in short run equilibrium when its quantitydemanded and quantity supplied is equal at the price which clears the market.Online Live Tutor Conditions of Equilibrium of the Firm and Industry: We have the best tutors in Economics in the industry. Our tutors can break down a complex Conditions ofEquilibrium of the Firm and Industry problem into its sub parts and explain to you in detail how each step isperformed. This approach of breaking down a problem has been appreciated by majority of our students for learningConditions of Equilibrium of the Firm and Industry concepts. You will get one-to-one personalized attentionthrough our online tutoring which will make learning fun and easy. Our tutors are highly qualified and holdadvanced degrees. Please do send us a request for Conditions of Equilibrium of the Firm and Industry tutoring andexperience the quality yourself.Online Equilibrium of the Firm and Industry Help:If you are stuck with Equilibrium of the Firm and Industry Homework problem and need help, we have excellenttutors who can provide you with Homework Help. Our tutors who provide Equilibrium of the Firm and Industryhelp are highly qualified. Our tutors have many years of industry experience and have had years of experienceproviding Equilibrium of the Firm and Industry Homework Help. Please do send us the Equilibrium of the Firm andIndustry problems on which you need help and we will forward then to our tutors for review.Q4. What is monetary policy?Explain the general objectives and instruments of monetary policy?Monetary PolicyMonetary policy, in its narrow concept, is defined as the measures focused on regulating money supply. In harmonywith monetary policy goals, as will be shown later, and adopting the most common concept of monetary policy asone of the central bank‘s functions, monetary policy is defined as ― the set of procedures and measures taken bymonetary authorities to manage money supply, interest and exchange rates and to influence credit conditions toachieve certain economic objectives‖. We find this definition more consistent with the practical applications ofmonetary policy, particularly with respect to the difference from one country to another in objectives selected as alink between the instruments of monetary policy and its ultimate goals.First: Monetary Policy and General Economic PoliciesMonetary policy is basically a type of stabilization policy adopted by countries to deal with different economicimbalances. Since monetary policy covers the monetary aspect of the general economic policy, a high level of co-ordination is required between monetary policy and other instruments of economic policy. Further, the effectivenessof monetary policy and its relative importance as a tool of economic stabilization various from one economy toanother, due to differences among economic structures, divergence in degrees of development in money and capitalmarkets resulting in differing degree of economic progress, and differences in prevailing economic conditions.However, we may briefly mention that the weak effectiveness which is usually attributed to monetary policy indeveloping countries is caused by the fact that the economic problems in these countries are mainly structural andnot monetary in nature, while the limited effectiveness of monetary policy in countries which lack developed moneymarkets occurs because monetary policy is deprived of one of its major tools, the instrument of open marketoperations.Also, there are those who belittle the effectiveness of monetary policy in time of recession, comparing the use of thispolicy in controlling recession as ―pressing on a spring‖. Many others see monetary policy as ineffective incontrolling the inflation that results from an imbalance between the demand and supply of goods and servicesoriginating from the supply side, while they confirm the effectiveness of monetary policy in controlling inflation thatresults from increased demand. However, this does not preclude the effectiveness of monetary policy as a flexible
10. 10. MB0042instrument allowing the authorities to move quickly to achieve stabilization, apart from its importance in realizingexternal equilibrium in open economies.Monetary Policy InstrumentsThe set of instruments available to monetary authorities may differ from one country to another, according todifferences in political systems, economic structures, statutory and institutional procedures, development of moneyand capital markets and other considerations. In most advanced capitalist countries, monetary authorities use one ormore of the following key instruments: changes in the legal reserve ratio, changes in the discount rate or the officialkey bank rate, exchange rates and open market operations. In many instances, supplementary instruments are used,known as instruments of direct supervision or qualitative instruments. Although the developing countries use one ormore of these instruments, taking into consideration the difference in their economic growth levels, the dissimilarityin the patterns of their production structures and the degree of their of their link with the outside world, many resortto the method of qualitative supervision, particularly those countries which face problems arising from the nature oftheir economic structures. Although the effectiveness of monetary policy does not necessarily depend on using awide range of instruments, coordinated use of various instruments is essential to the application of a rationalmonetary policy.SET22Q. Define the term equilibrium. Explain the changes in market equilibrium and effects of shifts in supplyand demand.Meaning of equilibriumThe word equilibrium is derived from the Latin word ―aequilibrium‖ which means equal balance. It means a state ofeven balance in which opposing forces or tendencies neutralize each other. It is a position of rest characterized byabsence of change. It is a state where there is complete agreement of the economic plans of the various marketparticipants so that no one has a tendency to revise or alter his decision. In the words of professor Mehta:―Equilibrium denotes in economics absence of change in movement.‖ Changes in Market Equilibrium:The changes in equilibrium price will occur when there will be shift either in demand curve or in supply curve orboth:Effects of Shift in demand:Demand changes when there is a change in the determinants of demand like the income, tastes, prices of substitutesand complements, size of the population etc. If demand raises due to a change in any one of these conditions thedemand curve shifts upward to the right. If, on the other hand, demand falls, the demand curve shifts downward tothe left. Such rise and fall in demand are referred to as increase and decrease in demand.A change in the market equilibrium caused by the shifts in demand can be explained with the help of a diagram.Effects of Changes in Demand and Supply:Changes can occur in both demand and supply conditions. The effects of such changes on the market equilibriumdepend on the rate of change in the two variables. If the rate of change in demand is matched with the rate of changein supply there will be no change in the market equilibrium, the new equilibrium shows expanded market withincreased quantity of both supply and demand at the same price.This is made clear from the diagram below:
11. 11. MB0042Similar will be the effects when the decrease in demand is greater than the decrease in supply on the marketequilibrium.Q6. Suppose your manufacturing company planning to release a new product into market, Explain thevarious methods forecasting for a new product.When a manufacturing companies planning to release a new product into themarket, it should perform the demandforecasting to check the demand of the product in the market and also the availability of similar product in themarket.Demand forecasting for new products is quite different from that for established products. Here the firms will nothave any past experience or past data for this purpose. An intensive study of the economic and competitivecharacteristics of the product should be made to make efficient forecasts.As per Professor Joel Dean, few guidelines to make forecasting of demand for new products are:a. Evolutionary approachThe demand for the new product may be considered as an outgrowth of an existing product. For e.g., Demand fornew Tata Indica, which is a modified version of Old Indica can most effectively be projected based on the sales ofthe old Indica, the demand for new Pulsor can be forecasted based on the sales of the old Pulsar. Thus when a newproduct is evolved from the old product, the demand conditions of the old product can be taken as a basis forforecasting the demand for the new product.
12. 12. MB0042b. Substitute approachIf the new product developed serves as substitute for the existing product, the demand for the new product may beworked out on the basis of a ‗market share‘. The growths of demand for all the products have to be worked outon the basis of intelligent forecasts for independent variables that influence the demand for the substitutes. Afterthat, a portion of the market can be sliced out for the new product. For e.g., A moped as a substitute for a scooter, acell phone as a substitute for a land line. In some cases price plays an important role in shaping future demand forthe product.c. Opinion Poll approachUnder this approach the potential buyers are directly contacted, or through the use of samples of the new productand their responses are found out. These are finally blown up to forecast the demand for the new product.d. Sales experience approachOffer the new product for sale in a sample market; say supermarkets or big bazaars in big cities, which are also bigmarketing centers. The product may be offered for sale through one super market and the estimate of sales obtainedmay be ‗blown up‘ to arrive at estimated demand for the product.e. Growth Curve approachAccording to this, the rate of growth and the ultimate level of demand for the new product are estimated on the basisof the pattern of growth of established products. For e.g., An Automobile Co., while introducing a new version of acar will study the level of demand for the existing car.f. Vicarious approachA firm will survey consumers‘ reactions to a new product indirectly through getting in touch with some specializedand informed dealers who have good knowledge about the market, about the different varieties of the productalready available in the market, the consumers‘ preferences etc. This helps in making a more efficient estimation offuture demand.ORQ2. Define the term equilibrium. Explain the changes in market equilibrium and effects to shifts in supplyand demand.EquilibriumThe word equilibrium is derived from the Latin word a ―equilibrium‖ which means equal balance. It means a state ofeven balance in which opposing forces or tendencies neutralize each other. It is a position of rest characterized byabsence of change. It is a state where there is complete agreement of the economic plans of the various marketparticipants so that no one has a tendency to revise or alter his decision. In the words of professor Mehta:―Equilibrium denotes in economics absence of change in movement‖.Market EquilibriumThere are two approaches to market equilibrium viz., partial equilibrium approach and the general equilibriumapproach. The partial equilibrium approach to pricing explains price determination of a single commodity keepingthe prices of other commodities constant. On the other hand, the general equilibrium approach explains the mutualand simultaneous determination of the prices of all goods and factors. Thus it explains a multi market equilibriumposition. Earlier to Marshall, there was a dispute among economists on whether the force of demand or the force of supply ismore important in determining price. Marshall gave equal importance to both demand and supply in thedetermination of value or price. He compared supply and demand to a pair of scissors We might as reasonably dispute whether it is the upper or the under blade of a pair of scissors that cuts a piece ofpaper, as whether value is governed by utility or cost of production. Thus neither the upper blade nor the lower bladetaken separately can cut the paper; both have their importance in the process of cutting. Likewise neither supplyalone, nor demand alone can determine the price of a commodity, both are equally important in the determination ofprice. But the relative importance of the two may vary depending upon the time under consideration. Thus, thedemand of all consumers and the supply of all firms together determine the price of a commodity in the market.Equilibrium between demand and supply price:Equilibrium between demand and supply price is obtained by the interaction of these two forces. Price is anindependent variable. Demand and supply are dependent variables. They depend on price. Demand varies inverselywith price; arise in price causes a fall in demand and a fall in price causes a rise in demand. Thus the demand curvewill have a downward slope indicating the expansion of demand with a fall in price and contraction of demand witha rise in price. On the other hand supply varies directly with the changes in price, a rise in price causes arise insupply and a fall in price causes a fall in supply. Thus the supply curve will have an upward slope. At a point wherethese two curves intersect with each other the equilibrium price is established. At this price quantity demanded isequal to the quantity demanded.This we can explain with the help of a table and a diagram
13. 13. MB0042In the table at Rs.20 the quantity demanded is equal to the quantity supplied. Since the price is agreeable to both thebuyer and sellers, there will be no tendency for it to change; this is called equilibrium price. Suppose the price fallsto Rs.5 the buyer will demand 30 units while the seller will supply only 5 units. Excess of demand over supplypushes the price upward until it reaches the equilibrium position supply is equal to the demand. On the other hand ifthe price rises to Rs.30 the buyer will demand only 5 units while the sellers are ready to supply 25 units. Sellerscompete with each other to sell more units of the commodity. Excess of supply over demand pushes the pricedownward until it reaches the equilibrium. This process will continue till the equilibrium price of Rs.20 is reached.Thus the interactions of demand and supply forces acting upon each other restore the equilibrium position inthe market. In the diagram DD is the demand curve, SS is the supply curve. Demand and supply are in equilibriumat point E where the two curves intersect each other. OQ is the equilibrium output. OP is the equilibrium price.Suppose the price OP2 is higher than the equilibrium price OP. at this point price quantity demanded isP2D2. ThusD2S2 is the excess supply which the seller wants to push into the market, competition among the sellers will bringdown the price to the equilibrium level where the supply is equal to the demand. At price OP1, the buyers willdemand P1D1 quantity while the sellers are ready to sell P1S1. Demand exceeds supply. Excess demand for goodspushes up the price; this process will go until equilibrium is reached where supply becomes equal to demand.Q5. Explain how a product would reach equilibrium position with the help of ISO - Quants and ISO-Costcurve.When producing a good or service, how do suppliers determine the quantity of factors to hire? Below, we workthrough an example where a representative producer answers this question.Let‘s begin by making some assumptions. First, we shall assume that our producer chooses varying amounts of twofactors, capital (K) and labor (L). Each factor was a price that does not vary with output.That is, the price of each unit of labor (w) and the price of each unit of capital (r) are assumed constant. We‘llfurther assume that w = \$10 and r = \$50. We can use this information to determine the producer‘s total cost. We callthe total cost equation an iso-cost line (it‘s similar to a budget constraint).The producer‘s iso-cost line is:10L + 50K = TC (1)The producer‘s production function is assumed to take the following form:q = (KL) 0.5 (2)Our producer‘s first step is to decide how much output to produce. Suppose that quantity is 1000 units of output. Inorder to produce those 1000 units of output, our producer must get a combination of L and K that makes (2) equal to1000. Implicitly, this means that we must find a particular isoquant.Set (2) equal to 1000 units of output, and solve for K. Doing so, we get the following equation for a specific iso-quant (one of many possible iso-quants):K = 1,000,000/L (2a)
14. 14. MB0042For any given value of L, (2a) gives us a corresponding value for K. Graphing these values, with K on the verticalaxis and L on the horizontal axis, we obtain the blue line on the graph below. Each point on this curve is representedas a combination of K and L that yields an output level of 1000 units. Therefore, as we move along this iso-quantoutput is constant (much like the fact that utility is constant as A basic understanding of statistics is a criticalcomponent of informed decision making.Q4. Critically examine the Marris growth maximizing model??Profit maximization is traditional objective of a firm. Sales maximization objective is explained by Prof. Boumal.On similar lines, Prof. Marris has developed another alternative growth maximization model in recent years. It is acommon factor to observe that each firm aims at maximizing its growth rate as this goal would answer many of theobjectives of a firm. Marris points out that a firm has to maximize its balanced growth rate over a period of time.Marris assumes that the ownership and control of the firm is in the hands of two groups of people, i.e. owner andmanagers. He further points out that both of them have two distinctive goals. Managers have a utility function inwhich the amount of salary, status, position, power, prestige and security of job etc are the most import variablewhere as in case of are more concerned about the size of output, volume of profits, market shares and salesmaximization.Utility function of the manager and that the owner are expressed in the following manner-Uo= f [size of output, market share, volume of profit, capital, public esteem etc.]Um= f [salaries, power, status, prestige, job security etc.]In view of Marris the realization of these two functions would depend on the size of the firm. Larger the firm,greater would be the realization of these functions and vice-versa. Size of the firm according to Marris depends onthe amount of corporate capital which includes total volume of the asset, inventory level, cash reserve etc. He furtherpoints out that the managers always aim at maximizing the rate of growth of the firm rather than growth in absolutesize of the firms. Generally managers like to stay in a grouping firm. Higher growth rate of the firm satisfy thepromotional opportunity of managers and also the share holders as they get more dividends.B o u ma l ’ s S a l e s M a x i m i z a t i o n mo d e l :Sales maximization model is an alternative for profit maximization model. This model is developed by Prof. W.J.Boumal, an American economist. This alternative goal has assumed greater significance in the context of the growthof the oligopolistic firms. The model highlights that the primary objective of the firm is to maximize its sales ratherthan profit maximization. It states that the goal of the firm is maximization of sales revenue subject to a minimumprofit constraint. The minimum profit constraint is determined by the expectation of the share holders. This isbecause no company can displease the shareholders. It is to be noted here that maximization of sales does not meanmaximization of physical sales but maximization of total sales revenue. Hence, the managers are more interested inincreasing sales rather than profit. The basic philosophy is that when sales are maximized automatically profits ofthe company would also go up. Hence, attention is diverted to increase the sales of the company in recent years inthe context of highly competitive market.How Profit Maximization model differs from Sales Maximization model:The sale maximization model differs on the following grounds: Emphasis is given on maximizing sales rather than profit. Increase the competitive and operational ability of the company. The amount of slack earning and salaries of the top managers are directly linked to it. It helps in enhancing the prestige and reputation of top management, distributes more dividends to share holders and increases the wage of the workers and keeps them happy. The financial and other lending institutions always keep a watch on the sales revenue of a firm as it is an indication of financial health of the firm.Q5. Define Pricing Policy. Explain the various objective of pricing policy. Pricing PoliciesA detailed study of the market structure gives us information about the way in which prices are determined underdifferent market conditions. However, in reality, a firm adopts different policies and methods to fix the price of itsproducts.Pricing policy refers to the policy of setting the price of the product or products and services by the managementafter taking into account of various internal and external factors, forces and its own business objectives.Pricing Policy basically depends on price theory that is the corner stone of economic theory. Pricing is considered asone of the basic and central problems of economic theory in a modern economy. Fixing prices are the mostimportant aspect of managerial decision making because market price charged by the company affects the presentand future production plans, pattern of distribution, nature of marketing etc. Generally speaking, in economic theory,we take into account of only two parties, i.e., buyers and sellers while fixing the prices. However, in practice many