Managerial theory

1. WELCOMEWELCOME

2. BAUMOL’S THEORY OFBAUMOL’S THEORY OF
SALES MAXIMIZATIONSALES MAXIMIZATION
SUBMITTED BY-SUBMITTED BY-
ManishManish
SUBMITTED TO –SUBMITTED TO –
Dr. Anju vermaDr. Anju verma

3. WILLIAM BAUMOLWILLIAM BAUMOL
• Born- feb.26.1922 (New York city)Born- feb.26.1922 (New York city)
• Nationality-United StatesNationality-United States
• Institution-New York University,Institution-New York University,
• Princeton University.Princeton University.
• Field-Microeconomics, Industrial OrganisationField-Microeconomics, Industrial Organisation
entrepreneurshipentrepreneurship

4. SALES MAXIMIZATIONSALES MAXIMIZATION
It is an approach ofIt is an approach of
business where thebusiness where the
company’ primary objectivecompany’ primary objective
is to earn as much revenueis to earn as much revenue
as possible.as possible.

5. PROFIT MAXIMIZATIONPROFIT MAXIMIZATION
It is an objective where theIt is an objective where the
company intends to generatecompany intends to generate
the highest net income overthe highest net income over
time.time.

6. BAUMOL THEORYBAUMOL THEORY
• According to Baumol, sales revenueAccording to Baumol, sales revenue
maximization is the most important goal ofmaximization is the most important goal of
managers.managers.
• ModelsModels
Static Model of Sales
Maximization
Dynamic Model of
Sales Maximization
Without
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With
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7. STATIC MODEL OF SALESSTATIC MODEL OF SALES
MAXIMISATIONMAXIMISATION
• Given minimum acceptable level of profit, the basicGiven minimum acceptable level of profit, the basic
assumptions of the model are :-assumptions of the model are :-
-The time horizon of the firm is a single period.-The time horizon of the firm is a single period.
-The firm is aiming for only that particular period it-The firm is aiming for only that particular period it
ignores what will happen in the subsequent periods as aignores what will happen in the subsequent periods as a
result of decision taken in current period.result of decision taken in current period.
-The certain minimum profit constraint is determined by-The certain minimum profit constraint is determined by
the market conditions.the market conditions.
-Demand curve is downward sloping curve and average-Demand curve is downward sloping curve and average
unit curve is U-shape.unit curve is U-shape.

8. STATIC MODEL WITHOUTSTATIC MODEL WITHOUT
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• In figure TC – Total Cost, TR – Total Revenue ∏- Profit. XIn figure TC – Total Cost, TR – Total Revenue ∏- Profit. X11 ––
Output level where profit level is maximum.XOutput level where profit level is maximum.X22 – Output level– Output level
where profit is less than at Xwhere profit is less than at X11 but sales are more.but sales are more.

9. • Sales maximiser sells at price lower thanSales maximiser sells at price lower than
profit maximiser.profit maximiser.
• Firm will not increase its sales beyond XFirm will not increase its sales beyond X22,,
because if profit is less thanbecause if profit is less than ∏∏ SMSM ,, It willIt will
not be acceptable to share holder and othernot be acceptable to share holder and other
lending Institutions and Managers.lending Institutions and Managers.

10. STATIC MODEL WITHSTATIC MODEL WITH
ADVERTISMENTADVERTISMENT
• We assume that sales revenue increases withWe assume that sales revenue increases with
advertising expenses.advertising expenses.
• An Oligopolistic firm will prefer to go for salesAn Oligopolistic firm will prefer to go for sales
maximization via an increase in advertisementmaximization via an increase in advertisement
rather than a price cut.rather than a price cut.
• The sales maximiser decides on optimumThe sales maximiser decides on optimum
advertisement by examining its impact on salesadvertisement by examining its impact on sales
revenue.revenue.

11. • TC – Total cost (CCTC – Total cost (CC11
+AC), BC – Production cost, TR – Total+AC), BC – Production cost, TR – Total
Revenue,Revenue, ∏ -∏ - Profit (TR-TC),Profit (TR-TC), ∏∏maxmax -- Maximum Profit,Maximum Profit, ∏∏SMSM ==SalesSales
maximization profit, Amaximization profit, A ∏∏ = Advertisement expenditure incurred= Advertisement expenditure incurred
by a profit maximiser, Aby a profit maximiser, ASS = Advertisement expenditure incurred= Advertisement expenditure incurred
by a sales maximiser.by a sales maximiser.

12. • This implies that with increase in advertisementThis implies that with increase in advertisement
expenditure, total cost, sales revenue and hence profit,expenditure, total cost, sales revenue and hence profit,
all increase proportionately.all increase proportionately.
• Production cost shown by BC line is assumed to beProduction cost shown by BC line is assumed to be
independent of advertising cost.independent of advertising cost.
• If price is such as to enable the firm to sell an outputIf price is such as to enable the firm to sell an output
yielding profit above the minimum acceptable profityielding profit above the minimum acceptable profit
level, firms will go for higher advertisement expenditurelevel, firms will go for higher advertisement expenditure
and yield greater revenue.and yield greater revenue.
• However, if profit falls belowHowever, if profit falls below ∏∏ SMSM , the firms cost, the firms cost
become too high and firm will cut back onbecome too high and firm will cut back on
advertisement.advertisement.
• Thus sales maximiser will spend more on advertisementThus sales maximiser will spend more on advertisement
than a profit maximiser.than a profit maximiser.

13. LIMITATIONSLIMITATIONS
• It try to explain long run behaviour of salesIt try to explain long run behaviour of sales
maximising firm. However in long run marketmaximising firm. However in long run market
demand, prices of factors of production etc.demand, prices of factors of production etc.
change. This model does not take these changeschange. This model does not take these changes
into account.into account.

14. TIME TO ASKTIME TO ASK
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15. THANK YOUTHANK YOU