English

Sales maximization does not necessarily mean an attempt to obtain the largest possible physical volume of sales; it means revenue maximization, where total revenue (R) is the product of the physical volume of output sold (Q) and the market price (P) per unit of output sold. Even if Q is very large, at P=O, the total revenue earned R=O. Thus there will normally be an well- determined output level, Q which maximizes the total revenue earned, R. This level can be ordinarily fixed by satisfying the first order condition, = 0, zero marginal revenue which implies that maximum revenue is obtained only at an output at which elasticity of demand for the output is unity. Recall, the price elasticity of demand

Baumol’s Sales Maximization Hypothesis Explanation1.jpg

If MR = 0, then

EP = AR/AR = 1

The revenue maximizing decision rule, MR = 0, replaces the profit maximizing decision rule MR=MC.

The fact that the oligopoly firms do not maximize pro/it does not mean that they do not have u profit policy. Most firms actually adjust their revenue maximizing price-output decision in view of a profit constraint. They set some minimum profit requirement, and thus they face the problem of constrained sales maximization. In order to facilitate the comparison between profit maximizing output, unconstrained revenue- maximizing output and profit-costarred revenue-maximizing output, the following diagram is constructed. We have here total revenue (R), total costs (e) and total profits (n)-all as functions of output. The level of profit-maximing output at which MR=MC (i.e., slopes of revenue and cost curves are equal) is 0: The unconstrained revenue-maximizing output at which MR=O is O the profit curve, 1; is at maximum corresponding to OQ~ The level of output at which costs are just B covered by revenue, is the break-even level of output O ; profits gradually increase beyond this level of output and...