"The considertion of his own privte profit is the sole motive which determines the owner of ny cpitl to employ it either in griculture, in mnufctures, or in some prticulr brnch of the wholesle or retil trde." (Smith, 1965)
In the following pper I will discuss the theories of profit mximiztion tht rgue bout different pproches to the question. Discussion includes Bumol's theory of sles mximiztion, mngeril utility theory by Willimson nd the theory of stisficing introduced by Simon.
Sles mximistion under profit constrint does not men n ttempt to obtin the lrgest possible physicl volume (which is hrdly esy to define in the modern multi-product firm). Rther it refers to mximistion of totl revenue (dollr sles) which, to the businessmn, is the obvious mesure of the mount he hs sold. Mximum sles in this sense need not require very lrge physicl outputs. To tke n extreme cse, t zero price physicl volume my be high but
dollr sles volume will be zero. There will normlly be well determined output level which mximises dollr sles. This level cn ordinrily be fixed with the id of the well known rule tht mximum revenue will be ttined only t n output t which the elsticity of demnd is unity, i.e. t which mrginl revenue is zero. (Johnson, Scholes, 2006)
The essentils of Bumol's model cn most esily be exmined with the help of digrm showing totl cost nd totl revenue cu ...Show more