The static singleperiod sales maximization model
The firm produces a single product and has non-linear total cost and revenue functions. The firm makes its price output decision without taking account of the actions of other firms. The firm's objective is to choose a level of sales or output that maximizes sales revenue TR subject to a minimum profit constraint set by shareholders c - The impact of the model can be observed in Figure 2.1. The total revenue curve TR , the total cost curve TC and the profit function are shown. Sales revenue is...
Exercise
By looking at recent newspaper stories a Identify business situations where risk is involved and whether insurance could be purchased to meet the consequences of an adverse outcome occurring b Identify business situations where uncertainty is involved. Is insurance available in these situations c Identify industries where the level of uncertainty is high and those where it is low. What are the main sources of uncertainty in these industries d Identify firms that face high levels of uncertainty...
Case Study 52 Estimating elasticities for petrol
Estimates of elasticities of demand are generally derived from modelling demand using regression analysis. These methods are discussed in Chapter 6, but an example of the outcomes for such studies is given below using petrol as its subject. Companies make estimates of own price elasticities of demand for their products. Likewise, academic economists undertake similar studies and many have been undertaken for products, such as alcoholic drinks, petrol and tobacco products, which governments in...
Advertising and the static model
The sales revenue-maximizing firm is in a stronger position than the profit maximizer to increase market share, which business strategists see as an important objective. Baumol envisages enterprises moving to new and higher total revenue curves by advertising. Advertising is used to give information to consumers and to persuade them to buy the product. Baumol assumes that the marginal revenue of advertising is always positive and that the market price of the goods remains unchanged. Thus,...
Williamsons Managerial Utility Model
Williamson 1963 sought to explain firm behaviour by assuming senior management seeks to maximize its own utility function rather than that of the owners. Managers find satisfaction in receiving a salary, knowing they hold a secure job, that they are important, have power to make decisions and receive professional and public recognition. Of these, only salary is directly measurable in monetary terms, but the other non-pecuniary benefits are related to expenditures on Staff S , the more staff...
Comparison Of Behavioural And Traditional Theories
The behavioural model has been extensively criticized by economists. A summary of the assumptions of the model and those of profit-maximizing are presented in Table 2.1. The behavioural model makes use of a more realistic decision-making process for a large enterprise where the power of decision making is not in the hands of a single individual and helps to build a picture of the firm as an actual organization. It points to the way real organizations might operate and make decisions through the...
Objectives
A pool of resources labour, physical capital, financial capital and learned skills and competences to be allocated roles by managers. Administrative or organizational structures through which production is organized. Performance assessment by owners, managers and other stakeholders. Whatever its size, a firm is owned by someone or some group of individuals or organizations. These are termed shareholders and they are able to determine the objectives and activities of the firm. They also appoint...