Name : PRASHANT D.

DEVALE

Roll Number : 510932455

Learning Centre : KARROX TECHNOLOGIES LTD,

Andheri

Subject : Managerial Economics

Date Of Submission : 13th June, 2009

Assignment No. : MB0026

 MANAGERIAL ECONIMICS
MB0026

SET – 1

Q1. Define Managerial Economics and discuss its

importance and functions.

Answer –

Managerial economics is a science that deals with the application

of various economic theories, principles, concepts and techniques
to business management in order to solve business and
management problems. It deals with the practical application of
economic

Important Features of managerial Economics:-

1. It is a new discipline and of recent origin

2. It is a highly specialized and separate branch by itself.
3. It is basically a branch of microeconomics and as such it studies
the problems of only one firm in detail.
4. It is mainly a normative science and as such it is a goal
oriented and prescriptive science.
5. It is more realistic, pragmatic and highlights on practical
application of various economic theories to solve business and
management problems.
6. It is a science of decision-making. It concentrates on decision-
making process, decision models and decision variables and their
relationships.
7. It is both conceptual and metrical and it helps the decision
maker by providing measurement of various economic variables
and their interrelationships.
8. It uses various macro economic concepts like national income,
inflation, deflation, trade cycles etc to understand and adjust its
policies to the environment in which the firm operates.
9. It also gives importance to the study of no economic variables
having implications of economic performance of the firm. For
example, impact of technology, environmental forces,
sociopolitical and cultural factors etc.
10. It uses the services of many other sister sciences like
mathematics, statistics, engineering, accounting, operation
research and psychology etc to find solutions to business and
management problems.

Two major functions of a Managerial Economist.

A Managerial Economist is a specialist and an expert in analyzing
and finding answers to business and managerial problems. He has
in-depth knowledge of the subject. He is an authority and has
total command over his subject. A Managerial Economist has to
perform several functions in an organization. Among them,
decision-making and forward planning are described as the two
major functions and all other functions are derived from these two
basic functions. A detailed description of the two functions is as
follows.

1. Decision-making:-
The word ‘decision’ suggests a deliberate choice made out of
several possible alternative courses of action after carefully
considering them. The act of choice signifying solution to an
economic problem is economic decision making. It involves
choices among a set of alternative courses of action. Decision-
making is essentially a process of selecting the best out of many
alternative Opportunities or courses of action that are open to a
management.
Decision-making is a management function. Decision making is a
routine affair in any business unit. Hence, it is a part of business
activity. It is a basic function of a managerial economist. In the
day today business, he has to take innumerable decisions.
Sometimes the manager takes the decision himself, sometimes in
collaboration and consultations with others. Some decisions are
taken on the spot and some others are taken after careful
thinking. Some decisions are major and complex while others are
minor and simple. Some decisions are taken in the absence of any
information. Some decisions are taken in the background of
certainty, known factors and information. Some other decisions
are taken in the midst of uncertainties. The choice made by the
business executives are difficult, crucial and have far-reaching
consequences. The basic aim of taking a decision is to select the
best course of action which maximizes the economic benefits and
minimizes the use of scarce resources of a firm. Hence, each
decision involves cost benefit analysis. Any slight error or delay in
decision making may cause considerable economic and financial
damage to a firm. It is for this reason, management experts are of
the opinion that right decision – making at the right time is the
secret of a successful manager.

2. Forward planning:-
The term ‘planning’ implies a consciously directed activity with
certain predetermined goals and means to carry them out. It is a
deliberate activity. It is a programmed action. Basically Planning is
concerned with tackling future situations in a systematic manner.
Forward planning implies planning in advance for the future. It is
associated with deciding the future course of action of a firm. It is
prepared on the basis of past and current experience of a firm. It
is prepared in the background of uncertain and unpredictable
environment and guess work. Future events and happenings
cannot be predicted accurately. The success or failure of the
future plan depends on a number of factors and forces which are
unknown in nature. Much of economic activity is forward looking.
Every time we build a new factory, add to the stocks of inputs,
trucks, computers or improvements in R&D, our intension is to
enhance the future productivity of the firm. Growing firms devote
a significant share of their current output to net capital formation
to bolster future economic output. A business executive must be
sufficiently intelligent enough to think in advance, prepare a
sound plan and take all possible precautionary measures to meet
all types of challenges of the future business. Hence, forward
planning has acquired greater significance in business circles.

Q.2 What is elasticity of demand? Explain the different

degree of price elasticity with suitable examples.
Answer –

The term elasticity is borrowed from physics. It shows the reaction

of one variable with respect to a change in other variables on
which it is dependent. Elasticity is an index of Reaction. Elasticity
of demand is generally defined as the responsiveness or
sensitiveness of demand to a given change in the price of a
commodity

Price Elasticity of Demand:-

Price elasticity of demand is one of the important concepts of

elasticity which is used to describe the effect of change in price
on quantity demanded.
Different Degree of Price Elasticity of Demand

1.Perfectly Elastic Demand: In this case, a very small change in

price leads to an infinite change in demand. The demand cure is a
horizontal line and parallel to OX axis. The numerical coefficient of
perfectly elastic demand is infinity (ED=00).
2. Perfectly Inelastic Demand: In this case, what ever may be the
change in price, quantity demanded will remain perfectly
constant. The demand curve is a vertical straight line and parallel
to OY axis. Quantity demanded would be 10 units, irrespective of
price changes from Rs. 10.00 to Rs. 2.00. Hence, the numerical
coefficient of perfectly inelastic demand is zero. ED = 0

3. Relative Elastic Demand: In this case, a slight change in price

leads to more than proportionate change in demand. One can
notice here that a change in demand is more than that of change
in price. Hence, the elasticity is greater than one. For e.g., price
falls by 3 % and demand rises by 9 %. Hence, the numerical
coefficient of demand is greater than one.
4. Relatively Inelastic Demand In this case, a large change in
price, say 8 % fall price, leads to less than proportionate change
in demand, say 4 % rise in demand. One can notice here that
Change in demand is less than that of change in price. This can be
represented by a steeper demand curve. Hence, elasticity is less
than one
5. Unitary elastic demand: In this case, proportionate change in
price leads to equal proportionate change in demand. For e.g., 5
% fall in price leads to exactly 5 % increase in demand. Hence,
elasticity is equal to unity. It is possible to come across unitary
elastic demand but it is a rare phenomenon.

Out of five different degrees, the first two are theoretical and the
last one is a rare possibility. Hence, in all our general discussion,
we make reference only to two terms relatively elastic demand
and relatively inelastic demand.
Q.3 Suppose your manufacturing company planning to
release a new product into market, Explain the various
methods forecasting for a new product

Answer –

Methods Or Techniques Of Forecasting:-

Demand forecasting is a highly complicated process as it deals

with the estimation of future demand. It requires the assistance
and opinion of experts in the field of sales management. While
estimating future demand, one should not give too much of
importance to either statistical information, past data or
experience, intelligence and judgment of the experts. Demand
forecasting, to become more realistic should consider the two
aspects in a balanced manner. Application of commonsense is
needed to follow a pragmatic approach in demand forecasting.

Broadly speaking, there are two methods of demand forecasting.

They are:

1. Survey methods and

2. Statistical methods.

a. Survey Methods:-
Survey methods help us in obtaining information about the future
purchase plans of potential buyers through collecting the opinions
of experts or by interviewing the consumers. These methods are
extensively used in short run and estimating the demand for new
products. There are different approaches under survey methods.
They are
A. Consumers’ interview method: under this method, efforts
are made to collect the relevant information directly from the
consumers with regard to their future purchase plans. In order to
gather information from consumers, a number of alternative
techniques are developed from time to time. Among them, the
following are some of the important ones.
Survey of buyer’s intentions or preferences: It is one of the oldest
methods of demand forecasting. It is also called as “Opinion
surveys”. Under this method, consumer buyers are requested to
indicate their preferences and willingness about particular
products. They are asked to reveal their ‘future purchase plans
with respect to specific items. They are expected to give answers
to questions like what items they intend to buy, in what quantity,
why, where, when, what quality they expect, how much money
they are planning to spend etc. Generally, the field survey is
conducted by the marketing research department of the company
or hiring the services of outside research organizations consisting
of learned and highly qualified professionals. The heart of the
survey is questionnaire. It is a comprehensive one covering
almost all questions either directly or indirectly in a most
intelligent manner. It is prepared by an expert body who are
specialists in the field or marketing. The questionnaire is
distributed among the consumer buyers either through mail or in
person by the company. Consumers are requested to furnish all
relevant and correct information. The next step is to collect the
questionnaire from the consumers for the purpose of evaluation.
The materials collected will be classified, edited analyzed. If any
bias prejudices, exaggerations, artificial or excess demand
creation etc., are found at the time of answering they would be
eliminated. The information so collected will now be consolidated
and reviewed by the top executives with lot of experience. It will
be examined thoroughly. Inferences are drawn and conclusions
are arrived at. Finally a report is prepared and submitted to
management for taking final decisions.

The success of the survey method depends on many factors.

1) The nature of the questions asked,
2) The ability of the surveyed
3) The representative of the samples
4) Nature of the product
5) Characteristics of the market
6) Consumer buyer’s behavior, their intentions, attitudes,
thoughts, motives, honesty etc.
7) Techniques of analysis
8) Conclusions drawn etc.
The management should not entirely depend on the results of
survey reports to project future demand. Consumer buyers may
not express their honest and real views and as such they may
give only the broad trends in the market. In order to arrive at right
conclusions, field surveys should be regularly checked and
supervised. This method is simple and useful to the producers
who produce goods in bulk. Here the burden of forecasting is put
on customers. However this method is not much useful in
estimating the future demand of the households as they run in
large numbers and also do not freely express their future demand
requirements. It is expensive and also difficult. Preparation of a
questionnaire is not an easy task. At best it can be used for short
term forecasting.

B. Direct Interview Method

Experience has shown that many customers do not respond to
questionnaire addressed to them even if it is simple due to varied
reasons. Hence, an alternative method is developed. Under this
method, customers are directly contacted and interviewed. Direct
and simple questions are asked to them. They are requested to
answer specifically about their budget, expenditure plans,
particular items to be selected, the quality and quantity of
products, relative price preferences etc. for a particular period of
time. There are two different methods of direct personal
interviews. They are as follows:

i. Complete enumeration method :

Under this method, all potential customers are interviewed in a

particular city or a region. The answers elicited are consolidated
and carefully studied to obtain the most probable demand for a
product. The management can safely project the future demand
for its products. This method is free from all types of prejudices.
The result mainly depends on the nature of questions asked and
answers received from the customers. However, this method
cannot be used successfully by all sellers in all cases. This method
can be employed to only those products whose customers are
concentrated in a small region or locality. In case consumers are
widely dispersed, this method may not be physically adopted or
prove costly both in terms of time and money. Hence, this method
is highly cumbersome in nature.

ii. Sample survey method or the consumer panel method :

Experience of the experts’ show that it is impossible to approach

all customers; as such careful sampling of representative
customers is essential. Hence, another variant of complete
enumeration method has been developed, which is popularly
known as sample survey method. Under this method, different
cross sections of customers that make up the bulk of the market
are carefully chosen. Only such consumers selected from the
relevant market through some sampling method are interviewed
or surveyed. In other words, a group of consumers are chosen and
queried about their preferences in concrete situations. The
selection of a few customers is known as sampling. The selected
consumers form a panel. This method uses either random
sampling or the stratified sampling technique. The method of
survey may be direct interview or mailed questionnaire to the
selected consumers. On the basis of the views expressed by these
selected consumers, most likely demand may be estimated. The
advantage of a panel lies in the fact that the same panel is
continued and new expensive panel does not have to be
formulated every time a new product is investigated. As
compared to the complete enumeration method, the sample
survey method is less tedious, less expensive, much simpler and
less time consuming. This method is generally used to estimate
short run demand by government departments and business
firms. Success of this method depends upon the sincere
cooperation of the selected customers. Hence, selection of
suitable consumers for the specific purpose is of great
importance. Even with careful selection of customers and the
truthful information about their buying intention, the results of the
survey can only be of limited use. A sudden change in price,
inconsistency in buying intentions of consumers, number of
sensible questions asked and dropouts from the panel for various
reasons put a serious limitation on the practical usefulness of the
panel method.

C. Collective opinion method or opinion survey method

This is a variant of the survey method. This method is also known
as “Sales – force polling” or “Opinion poll method”. Under this
method, sales representatives, professional experts and the
market consultants and others are asked to express their
considered opinions about the volume of sales expected in the
future. The logic and reasoning behind the method is that these
salesmen and other people connected with the sales department
are directly involved in the marketing and selling of the products
in different regions. Salesmen, being very close to the customers,
will be in a position to know and feel the customer’s reactions
towards the product. They can study the pulse of the people and
identify the specific views of the customers. These people are
quite capable of estimating the likely demand for the products
with the help of their intimate and friendly contact with the
customers and their personal judgments based on the past
experience. Thus, they provide approximate, if not accurate
estimates. Then, the views of all salesmen are aggregated to get
the overall probable demand for a product. Further, these
opinions or estimates collected from the various experts are
considered, consolidated and reviewed by the top executives to
eliminate the bias or optimism and pessimism of different
salesmen. These revised estimates are further examined in the
light of factors like proposed change in selling prices, product
designs and advertisement programs, expected changes in the
degree of competition, income distribution, population etc. The
final sales forecast would emerge after these factors have been
taken into account. This method heavily depends on the collective
wisdom of salesmen, departmental heads and the top executives.
It is simple, less expensive and useful for short run forecasting
particularly in case of new products. The main drawback is that it
is subjective and depends on the intelligence and awareness of
the salesmen. It cannot be relied upon for long term business
planning.
D. Delphi Method or Experts Opinion Method
This method was originally developed at Rand Corporation in the
late 1940’s by Olaf Helmer, Dalkey and Gordon. This method was
used to predict future technological changes. It has proved more
useful and popular in forecasting non– economic rather than
economical variables.It is a variant of opinion poll and survey
method of demand forecasting. Under this method, outside
experts are appointed. They are supplied with all kinds of
information and statistical data. The management requests the
experts to express their considered opinions and views about the
expected future sales of the company. Their views are generally
regarded as most objective ones. Their views generally avoid or
reduce the “Halo – Effects” and “Ego – Involvement” of the views
of the others. Since experts’ opinions are more valuable, a firm
will give lot of importance to them and prepare their future plan
on the basis of the forecasts made by the experts.

E. End Use or Input – Output Method

Under this method, the sale of the product under consideration is
projected on the basis of Demand surveys of the industries using
the given product as an intermediate product. The Demand for
the final product is the end – use demand of the intermediate
product used in the production of the final product. An
intermediate product may have many end – users, For e.g., steel
can be used for making various types of agricultural and industrial
machinery, for construction, for transportation etc. It may have
the demand both in the domestic market as well as international
market. Thus, end – use demand estimation of an intermediate
product may involve many final goods industries using this
product, at home and abroad. Once we know the demand for final
consumption goods including their exports we can estimate the
demand for the product which is used as intermediate good in the
production of these final goods with the help of input – output
coefficients. The input – output table containing input – output
coefficients for particular periods are made available in every
country either by the Government or by research organizations.
This method is used to forecast the demand for intermediate
products only. It is quite useful for industries which are largely
producers’ goods, like aluminum, steel etc. The main limitation of
the method is that as the number of end – users of a product
increase, it becomes more inconvenient to use this method.

Statistical Method :

It is the second most popular method of demand forecasting. It is

the best available technique and most commonly used method in
recent years. Under this method, statistical, mathematical
models, equations etc are extensively used in order to estimate
future demand of a particular product. They are used for
estimating long term demand. They are highly complex and
complicated in nature. Some of them require considerable
mathematical back – ground and competence. They use historical
data in estimating future demand. The analysis of the past
demand serves as the basis for present trends and both of them
become the basis for calculating the future demand of a
commodity in question after taking into account of likely changes
in the future. There are several statistical methods and their
application should be done by some one who is reasonably well
versed in the methods of statistical analysis and in the
interpretation of the results of such analysis.

Trend Projection Method

An old firm operating in the market for a long period will have the
accumulated previous data on either production or sales
pertaining to different years. If we arrange them in chronological
order, we get what is called as ‘time series’. It is an ordered
sequence of events over a period of time pertaining to certain
variables. It shows a series of values of a dependent variable say,
sales as it changes from one point of time to another. In short, a
time series is a set of observations taken at specified time,
generally at equal intervals. It depicts the historical pattern under
normal conditions. This method is not based on any particular
theory as to what causes the variables to change but merely
assumes that whatever forces contributed to change in the recent
past will continue to have the same effect. On the basis of time
series, it is possible to project the future sales of a company.
Further, the statistics and information with regard to the sales call
for further analysis. When we represent the time series in the
form of a graph, we get a curve, the sales curve. It shows the
trend in sales at different periods of time. Also, it indicates
fluctuations and turning points in demand. If the turning points
are few and their intervals are also widely spread, they yield
acceptable results. Here the time series show a persistent
tendency to move in the same direction. Frequency in turning
points indicates uncertain demand conditions and in this case, the
trend projection breaks down. The major task of a firm while
estimating the future demand lies in the prediction of turning
points in the business rather than in the projection of trends.
When turning points occur more frequently, the firm has to make
radical changes in its basic policy with respect to future demand.
It is for this reason that the experts give importance to
identification of turning points while projecting the future demand
for a product. The heart of this method lies in the use of time
series. Changes in time series arise on account of the following
reasons:
1. Secular or long run movements: Secular movements indicate
the general conditions and direction in which graph of a time
series move in relatively a long period of time.
2. Seasonal movements: Time series also undergo changes
during seasonal sales of a company. During festival season,
sales clearance season etc., we come across most
unexpected changes.
3. Cyclical Movements: It implies change in time series or
fluctuations in the demand for a product during different
phases of a business cycle like depression, revival, boom etc.
4. Random movement. When changes take place at random,
we call them irregular or random movements. These
movements imply sporadic changes in time series occurring
due to unforeseen events such as floods, strikes, elections,
earth quakes, droughts and other such natural calamities.
Such changes take place only in the short run. Still they have
their own impact on the sales of a company.
Q4. Define the term equilibrium. Explain the changes in
market equilibrium and effects to shifts in supply and
demand.

Answer –

Meaning of equilibrium
The word equilibrium is derived from the Latin word “equilibrium”
which means equal balance. It means a state of even balance in
which opposing forces or tendencies neutralize each other.
It is a position of rest characterized by absence of change. It is a
state where there is complete agreement of the economic plans of
the various market participants so that no one has a tendency to
revise or alter his decision. In the words of professor Mehta:
“Equilibrium denotes in economics absence of change in
movement.”

Changes in Market Equilibrium:-

The changes in equilibrium price will occur when there will be shift
either in demand curve or in supply curve or both.

Effects of shit in demand

Demand changes when there is a change in the determinants of
demand like the income, tastes, prices of substitutes and
complements, size of the population etc. If demand raises due to
a change in any one of these conditions the demand curve shifts
upward to the right. If, on the other hand, demand falls, the
demand curve shifts downward to the left. Such rise and fall in
demand are referred to as increase and decrease in demand. A
change in the market equilibrium caused by the shifts in demand
can be explained with the help of a diagram Quantity demanded
and supplied is shown on OX axis, Price is shown on OY axis. SS is
the supply curve which remains unchanged. DD is the demand
curve. Demand and supply curves intersect each other at point E.
Thus OP is the equilibrium price and OQ is the equilibrium
quantity demanded and supplied. Now, suppose the demand
increases. The demand curve shifts forward to D1D1. The new
demand curve intersects the supply curve at point E1, where the
quantity demanded increases to OQ1 and price to OP1. In the
same way, if the demand curve shifts backwards and assumes the
position D2D2, the new equilibrium will be at E2 and the quantity
demanded will be OQ2, price will be OP2. Thus the market
equilibrium price and quantity demanded will change when there
is and increase or decrease in demand.

Effects of Shifts In Supply

To study of the effects of changes in supply on market equilibrium
we assume the demand to remain constant. An increase in supply
is represented by a shift of the supply curve to the right and a
decrease in supply is represented by a shift to the left. The
general rule is, if supply increases, price falls and if supply
decreases price rises. We can show the effects of shifts in supply
with the help of a diagram In the diagram supply and demand
curves intersect each other at point E, establishing equilibrium
price at OP and equilibrium quantity supplied and demanded at
OQ. Suppose, supply increases and the supply curve shifts from
SS to S1S1. The new supply curve intersects the demand curve at
E1 reducing the equilibrium price to P1 and raising the quantity
demanded to OQ1. On the other hand if the supply decreases and
the supply curve shifts backward to S2S2, the equilibrium price is
pushed upwards to OP2 and the quantity demanded is reduced to
OQ2. Thus changes in supply, demand remaining constant will
cause changes in the market equilibrium.
Effects of Changes In Both Demand And Supply:

Changes can occur in both demand and supply conditions. The

effects of such changes on the market equilibrium depend on the
rate of change in the two variables. If the rate of change in
demand is matched with the rate of change in supply there will be
no change in the market equilibrium, the Effects Of Changes In
Both Demand And Supply Changes can occur in both demand and
supply conditions. The effects of such changes on the market
equilibrium depend on the rate of change in the two variables. If
the rate of change in demand is matched with the rate of change
in supply there will be no change in the market equilibrium, the
new equilibrium shows expanded market with increased quantity
of both supply and demand at the same price. If the increase in
demand is greater than the increase in supply, the new market
equilibrium is at a higher level showing a rise in both the
equilibrium price and the equilibrium quantity demanded and
supplied. On the other hand if the increase in supply is greater
than the increase in demand, the new market equilibrium is at
lower level, showing a lower equilibrium price and a higher
quantity of good supplied and demanded.

Q.5 Give a brief description of Implicit and Explicit cost

Actual and opportunity cost

Answer –

Implicit and Explicit Costs:-

Explicit costs are those costs which are in the nature of
contractual payments and are paid by an entrepreneur to the
factors of production [excluding himself] in the form of rent,
wages, interest and profits, utility expenses, and payments for
raw materials etc. They can be estimated and calculated exactly
and recorded in the books of accounts. Implicit or imputed costs
are implied costs. They do not take the form of cash outlays and
as such do not appear in the books of accounts. They are the
earnings of owner employed resources. For example, the factor
inputs owned by the entrepreneur himself like capital can be
utilized by himself or can be supplied to others for a contractual
sum if he himself does not utilize them in the business. It is to be
remembered that the total cost is a sum of both implicit and
explicit costs.

Actual costs and Opportunity Costs:-

Actual costs are also called as outlay costs, absolute costs and
acquisition costs. They are those costs that involve financial
expenditures at some time and hence are recorded in the books
of accounts. They are the actual expenses incurred for producing
or acquiring a commodity or service by a firm. For example,
wages paid to workers, expenses on raw materials, power, fuel
and other types of inputs. They can be exactly calculated and
accounted without any difficulty. Opportunity cost of a good or
service is measured in terms of revenue which could have been
earned by employing that good or service in some other
alternative uses. In other words, opportunity cost of anything is
the cost of displaced alternatives or costs of sacrificed
alternatives. It implies that opportunity cost of anything is the
alternative that has been foregone. Hence, they are also called as
alternative costs. Opportunity cost represents only sacrificed
alternatives. Hence, they can never be exactly measured and
recorded in the books of accounts. The knowledge of opportunity
cost is of great importance to management decision. They help in
taking a decision among alternatives. While taking a decision
among several alternatives, a manager selects the best one which
is more profitable or beneficial by sacrificing other alternatives.
For example, a firm may decide to buy a computer which can do
the work of 10 laborers. If the cost of buying a computer is much
lower than that of the total wages to be paid to the workers over a
period of time, it will be a wise decision. On the other hand, if the
total wage bill is much lower than that of the cost of computer, it
is better to employ workers instead of buying a computer. Thus, a
firm has to take a number of decisions almost daily.

Q.6 Critically examine Boumal’s static and dynamic

models.

Answer –

Boumal’s Static And Dynamic Models:-

Sales maximization model is an alternative model for profit
maximization. This model is developed by Prof. W.J.Boumal, an
American economist. This alternative goal has assumed greater
significance in the context of the growth of Oligopolistic firms. The
model highlights that the primary objective of a firm is to
maximize its sales rather than profit maximization. It states that
the goal of the firm is maximization of sales revenue subject to a
minimum profit constraint. The minimum profit constraint is
determined by the expectations of the share holders. This is
because no company can displease the share holders. It is to be
noted here that maximization of sales does not mean
maximization of physical sales but maximization of total sales
revenue. Hence, the managers are more interested in maximizing
sales rather than profit. The basic philosophy is that when sales
are maximized automatically profits of the company would also go
up. Hence, attention is diverted to increase the sales of the
company in recent years in the context of highly competitive
markets. In defense of this model, the following arguments are
given.
1. Increase in sales and expansion in its market share is a sign of
healthy growth of a normal company.
2. It increases the competitive ability of the firm and enhances its
influence in the market.
3. The amount of slack earnings and salaries of the top managers
are directly linked to it.
4. It helps in enhancing the prestige and reputation of top
management, distribute more dividends to share holders and
increase the wages of workers and keep them happy.
5. The financial and other lending institutions always keep a
watch on the sales revenues of a firm as it is an indication of
financial health of a firm.
6. It helps the managers to pursue a policy of steady performance
with satisfactory levels of profits rather than spectacular profit
maximization over a period of time. Managers are reluctant to
take up those kinds of projects which yield high level of profits
having high degree of risks and uncertainties. The risk averting
and avoiding managers prefer to select those projects which
ensure steady and satisfactory levels of profits. Prof, Boumal has
developed two models. The first is static model and the second
one is the dynamic model.
The Static Model:-
This model is based on the following assumptions.
1. The model is applicable to a particular time period and the
model does not operate at different periods of time.
2. The firm aims at maximizing its sales revenue subject to a
minimum profit constraint.
3. The demand curve of the firm slope downwards from left to
right.
4. .The average cost curve of the firm is Unshaped one.

Sales maximization [dynamic model]

In the real world many changes takes place which affects business
decisions of a firm. In order to include such changes, Boumal has
developed another dynamic model. This model explains how
changes in advertisement expenditure, a major determinant of
demand, would affect the sales revenue of a firm under severe
competitions.

Assumptions:-
1. Higher advertisement expenditure would certainly increase
sales revenue of a firm.
2. Market price remains constant.
3. Demand and cost curves of the firm are conventional in nature.
Generally under competitive conditions, a firm in order to increase
its volume of sales and sales revenue would go for aggressive
advertisements. This leads to a shift in the demand curve to the
right. Forward shift in demand curve implies increased
advertisement expenditure resulting in higher sales and sales
revenue. A price cut may increase sales in general. But increase in
sales mainly depends on whether the demand for a product is
elastic or inelastic. A price reduction policy may increase its sales
only when the demand is elastic and if the demand is inelastic;
such a policy would have adverse effects on sales. Hence, to
promote sales, advertisements become an effective instrument
today. It is the experience of most of the firms that with an
increase in advertisement expenditure, sales of the company
would also go up. A sales maximizer would generally incur higher
amounts of advertisement expenditure than a profit maximizer.
However, it is to be remembered that amount allotted for sales
promotion should bring more than proportionate increase in sales
and total profits of a firm. Otherwise, it will have a negative effect
on business decisions Thus, by introducing; a non price variable in
to his model, Boumal makes a successful attempt to analyze the
behavior of a competitive firm under oligopoly market conditions.
Under oligopoly conditions as there are only a few big firms
competing with each other either producing similar or
differentiated products, would resort to heavy advertisements as
an effective means to increase their sales and sales revenue. This
appears to be more practical in the present day situations.