Revenue vs. Profit Maximization: Comment

Larson, Alan L.; Giffin, Phillip E.

doi:10.2307/1057257

Cited by 2 publications

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“…According to Sandmeyer, 26 there are many possible constrained output levels in Baumol's work and the equilibrium in his work is only one of them. Roberts, 27 Patton, 28 McGuire et al, 29 Mabry and Siders, 30 Lackman and Craycraft, 31 Meeks and Whittington, 32 Amihud and Kamin, 33 Ciscel and Carroll, 34 Larson and Giffin, 35 Dunlevy, 36 Winn and Shoenhair 37 and Aronson et al 38 contribute the debate by making 23 various and empirical explanations. Koplin 39 emphasizes that profit maximization is only an assumption.…”

Section: Introductionmentioning

confidence: 99%

What does a firm maximize? A simple explanation with regard to economic growth

Mert

2018

International Journal of Engineering Business Management

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The purpose of this study is to explain the following proposition: Profit maximization objective is only an assumption, which is valid only when marginal cost is zero; a firm should maximize its total sales rather than its profit when marginal cost is not equal to zero. Using simple logical consequences, the study shows the following: (i) Cournot equilibrium occurs at total revenue maximization conditions rather than profit maximization conditions, even if costs are not neglected; (ii) if average costs of plants are not equal to each other, a multiple-plant monopoly cannot maximize its profit; it should maximize its total revenue, even if costs are not zero; (iii) a firm's goal should be total revenue maximization rather than profit maximization, when marginal cost is not equal to zero; (iv) profit maximization behaviour does not have to explain economic growth; however, total sales maximization behaviour clearly explains economic growth and (v) total sales maximization objective, at the producer's equilibrium conditions, guarantees stability under diminishing returns. The study concludes with nine simple results in order to support its claim. The results of the study emphasize that (i) an empirical analysis based on a strict theory should start to the analysis depending on a goal function which maximizes total sales rather than profit and (ii) a representative social planner who designs a growing economy, which grows thanks to total sales maximization behaviour of firms, should design the economy where price changes do not give advantage to the firms.

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