Profit Maximization and Baumol Model

1786 Words Jul 26th, 2009 8 Pages
Managerial Economics
August 15, 2007

The key points underpinning the economics of a profit maximizing firm
Neoclassical model of the firm states that organization will have the main objective of maximizing its profit within a given period of time. Maximum profit was achieved at the output at which marginal cost is equal marginal revenue.
There are several factors which need to be considered when talking about the profit maximizing firm: 1. The assumption of the profit maximizing firm is that there is no segregation between managers and owners of the firm. Owners economically depended on their firms and therefore tried to make the biggest profit from their businesses. The effectiveness of their firm was measured by the profit declared.
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- Rising level of sales recognizes organization’s success and therefore leads to good human relations within the organization. - Direct relation between market share and the level of sales means that the organization is raising its position on the market if its sales level increases. In other words the market share of the firm goes up.
In Baumol model there is an assumption is that the organization using the Baumol model is operating in an oligopolistic market with no true competition. Baumol thinks that it will take longer for the large organizations, which most likely to be competitors, to arrive to the decision making and decision implementation point due to the competition within the oligopolistic market. However it is also said that within the market there is collision between organizations just to maintain an agreed position where everyone can have their share of the market. This is certainly an assumption which cannot be applied to every kind of markets.
There are two models of sales revenue-maximization which both work under above assumption: the static model and the dynamic model.
Static model is a single period model for organization assuming that no competition with other companies exist. In static model a minimum profit constraint is imposed by shareholders regardless of the sales and other conditions of the organization to protect their interests. The