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Who can tell you what is the difference between a Baumol Static Revenue-Maximization Model with a Dynamic one?
Wiki User
∙ 15y ago
The main difference is that in the dynamic model the profit is reinvented allowing for more growth in the future, so it is a trade off between profit now or higher profits later, the management will need to get the shareholder to agree on that, a trust must be established between the shareholders and management.
Hence, int he dynamic model, the minimum profit is not actually a constraint as it is in the static model.
Wiki User
∙ 15y ago
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What can economic theory contribute to managerial economicswilliam j baumol?
what does economic theory contribute to managerial economics
What is economic fluctuation?
Cycling periods of good and bad times. Source: "Economics, Principles and Policy" William J Baumol and Alan S Blinder. Page 24.
Explain baumol's sales maximization theory.?
maximising sales and it is where AC=AR..this the point where the maximum amout of sales take place. The firm only makes a normal profit at this stage.
Do you agree with the traditional theory that assums profit maximization as the the sole objective of abusiness firm.list your arguments in favor of or against this theory?
The traditional theory of the firm tends to make a standard assumption that businesses possess the information, market power and motivation to set a price and output that maximises profits in the short or long run. This assumption is now criticised by economists who have studied the organisation and objectives of modern-day corporations and in particular the existence of a 'divorce of ownership and control' that is common to most large scale corporations.Why might a business depart from profit maximisation?There are numerous possible explanations. Some relation to the lack of accurate and detailed informationrequired to undertake optimal maximising behaviour. Others concentrate on the alternative objectives of modern businesses. We start first with the effects of imperfect information.Imperfect information about Demand and Cost ConditionsOne reason why firms might depart from profit maximisation is that it is difficult for them to identify their profit maximising output, as they cannot accurately calculate marginal revenue and marginal costs. Often the day-to-day pricing decisions of businesses are taken on the basis of "estimated demand conditions" rather than a systematic calculation of a demand curve. Most modern businesses are multi-product firms operating in a range of separate markets. The amount of information that they have to handle can be vast. And they must keep track of the changing preferences of consumers and ever-evolving market conditions. The idea that there is a neat and single profit maximising price is really redundant.Behavioural Theories of the FirmBehavioural economists believe that modern corporations are complex organizations made up of various groups or stakeholders. Stakeholders are defined as any identifiable groups who have a vested interest in the activity of a business. Examples of relevant stakeholders might include:Employees within a businessManagers employed by the firmShareholders - people who have an equity stake in a businessCustomers in the marketThe local communityThe government and it's agencies including local governmentEach of these groups is likely to have different objectives or goals at different points in time. The dominant group at any moment in time can give greater emphasis to their own objectives - for example price and output decisions may be taken at local level by managers - with shareholders taking only a distant and imperfectly informed view of the company's performance and strategy.Behavioural EconomicsBehavioural economics is a relatively new field of economics which looks directly at the way human behaviour and decision-making is modelled. By integrating economics with psychology, economists can benefit from the experience psychology has in examining our behaviour. Indeed many psychologists are teaming up with economists in an attempt to study human beings in the economic forum, the most recent team being the 2002 Nobel Prize winners Daniel Kahneman (a cognitive psychologist) and Vernon Smith (an experimental economist).For the first time, laboratory experiments are being used to provide serious empirical data for economists to study. These experimental economists use techniques borrowed from psychology to test human subjects in a controlled experiment. As methodology improves, such experiments are slowly gaining more credibility within the economic academia.Source: Jack Wills, Behavioural Economics and Rational Behaviour, 2003If firms are likely to move away from pure profit maximising behaviour, what are the alternatives? The reality is that there are numerous different strategies that can be employed. Although a business might have profitability as an important medium-term aim, it might depart from this in the short term.Here are some alternatives to pure profit maximisation strategies:Satisficing behaviour involves the owners setting minimum acceptable levels of achievement in terms of business revenue and profit.Sales Revenue MaximisationThe objective of maximising sales revenue rather than profits was initially developed by the work ofWilliam Baumol (1959). His research focused on the behaviour of manager-controlled businesses - price and output decisions taken by managers are divorced from the shareholders (the owners of the business). Baumol argued that annual salaries and other perks might be more closely correlated with total sales revenue rather than profits. Companies geared towards maximising revenue are likely to make frequent and extensive use of price discrimination (or yield management) as a means of extracting extra revenue from consumers.Managerial Satisfaction modelAn alternative view was put forward by Oliver Williamson (1981), who developed the concept of managerial satisfaction (or utility). This can be enhanced by success in raising sales revenue.Constrained Sales Revenue MaximisationShareholders of a business may introduce a constraint on the decisions of managers - known as constrained sales revenue maximisation. For example hey may introduce a minimum profit constraint designed to underpin the valuation of their shares and maintain a dividend.The diagram below shows how price and output differs if the firm changes its objective from profit to revenue maximisation. Assuming that the firm's costs remain the same, a firm will price lower and produce a higher output when sales revenue maximisation is the main objective.The profit maximising price is P2 at output Q2 whilst the revenue maximising price is P1 at output Q1. A change in the objectives of the business has an effect on economic welfare and in particular the balance between consumer and producer surplus. Consumer surplus is higher with sales revenue maximisation because output is higher and price is lower.Price and Output under Constrained Profit MaximisationShareholders might attempt to "constrain" the price and output decisions of managers by introducing aminimum profit constraint.Consider the following diagram on the next page:The normal profit maximising output is at Q2 (where the vertical distance between the total revenue and total cost curve is at its greatest)Revenue is maximised at output Q1 where the total revenue curve reaches a maximum (i.e. marginal revenue is zero)If shareholders insist on the business achieving a minimum profit as shown, then the managers of a business have the discretion to vary price and output anywhere between Q2 and Q4At any output beyond Q3 (where total revenue and total cost intersect) losses are madeThe short run supply decision - the shut-down priceThe theory of the firm assumes that a business needs to make at least normal profit in the long run to justify remaining in an industry but this is not a strict requirement in the short term. In the short run the firm will continue to produce as long as total revenue covers total variable costs or put another way, so long as price per unit > or equal to average variable cost (AR = AVC).The reason for this is as follows. A business's fixed costs must be paid regardless of the level of output. If we make an assumption that these costs are sunk costs (i.e. they cannot be covered if the firm shuts down) then the loss per unit would be greater if the firm were to shut down, provided variable costs are covered.ATC �Consider the cost and revenue curves facing a business in the short run in the diagram above.Average revenue (AR) and marginal revenue curves (MR) lies below average cost across the full range of output, so whatever output produced, the business faces making a lossAt P1 and Q1 (where marginal revenue equals marginal cost), the firm would shut down as price is less than AVC. The loss per unit of producing is vertical distance ACIf the firm shuts down production the loss per unit will equal the fixed cost per unit AB.Deriving the Competitive Firm's Supply Curve in the Short RunIn the short run, the supply curve is the marginal cost curve above average variable cost.In the long run, a firm must make a normal profit. When price = average total cost, this is the break-even point. It will therefore shut down at any price below this in the long run. As a result the long run supply curve will be the marginal cost curve above average total cost.A supply curve can only be derived from the marginal cost curve for firms operating in perfectly competitive markets. The concept of a 'supply curve' is inappropriate when dealing with monopoly situations because a monopoly is a price-maker, not a "passive" price-taker, and can thus select the price and output combination on the demand curve so as to maximise profits where marginal revenue = marginal cost.Author: Geoff Riley, Eton College, September 2006
When was William Baumol born?
William Baumol was born on 1922-02-26.
What are the criticism baumol's sales maximisation model?
Criticism of Baumol's sales maximization model includes the assumption of profit maximization as the main goal of firms, the lack of consideration for other objectives like shareholder wealth maximization, and the oversimplification of managerial behavior by focusing solely on sales revenue. Additionally, critics argue that the model does not account for dynamic market conditions and competitive strategies that firms may adopt.
How do you pronounce baumol?
you pronounce it like it is written as "ba-maal"
Boumal's static and dynamic models?
Baumol suggested sales revenue maximisation as an alternative goal to profit maximisation. He presented two basic models: A static single–period model and a multi-period dynamic model of growth of sales revenue maximisation. Each model has two versions, one with advertising activities and another without.
What can economic theory contribute to managerial economicswilliam j baumol?
what does economic theory contribute to managerial economics
What has the author Derek R Atkins written?
Derek R. Atkins has written: 'A re-examination of the Baumol and Quandt paradox'
What is BAT in financial modelling?
Baumol-Allais-Tobin (BAT) Model - classic means of analysing the cash management problem
How is baumol model workings?
Baumol Model :The Baumol model of cash management is extensively used and highly useful for the purpose of cash management. The Baumol model enables companies to find out their desirable level of cash balance under certainty. There are certain assumptions or ideas that are critical with respect to the Baumol model of cash management: * The particular company should be able to change the securities that they own into cash, keeping the cost of transaction the same. Under normal circumstances, all such deals have variable costs and fixed costs. * The company is capable of predicting its cash necessities. They should be able to do this with a level of certainty. The company should also get a fixed amount of money. They should be getting this money at regular intervals. * The company is aware of the opportunity cost required for holding cash. It should stay the same for a considerable length of time. * The company should be making its cash payments at a consistent rate over a certain period of time. In other words, the rate of cash outflow should be regular. Equational Representations in Baumol Model : * Holding Cost = k(C/2) * Total Cost = k(C/2) + c(T/C) * Transaction Cost = c(T/C)
What is economic fluctuation?
Cycling periods of good and bad times. Source: "Economics, Principles and Policy" William J Baumol and Alan S Blinder. Page 24.
What are the solutions to over trading?
-Consider increasing owners equity through business amgels if not venture capital -Employ good cash management techniques like Baumol model
What has the author William J Baumol written?
William J. Baumol has written: 'Instructor's manual to accompany \\' 'Health care as a handicraft industry' 'Perfect markets and easy virtue' 'Economics' -- subject(s): Economics 'Business behavior, value and growth' 'Welfare economics and the theory of the state' 'International trade and scale economies' 'Performing arts - the economic dilemma' 'Economics' -- subject(s): Economics 'On the social rate of discount' 'Business behaviour, value and growth'
Explain baumol's sales maximization theory.?
maximising sales and it is where AC=AR..this the point where the maximum amout of sales take place. The firm only makes a normal profit at this stage.
