What this lesson teaches
I can describe other goals a firm may chase: more revenue, enough profit (satisficing) or a bigger market share.
Syllabus 9570, 2.2.1(b). Objectives of Firms: Firms may choose to pursue alternative objectives such as revenue maximisation, profit satisficing and market share dominance
Make a guess
A manager's bonus depends on sales revenue, not profit. Compared with profit maximisation, what will the firm probably do?
- Produce more and charge a lower price.
- Produce less and charge a higher price.
- Produce the same, because revenue and profit peak together.
Show the answer
Produce more and charge a lower price.
Revenue is highest where MR = 0, which is a larger output than where MR = MC. Selling more needs a lower price.
Not every firm maximises profit: some maximise revenue, some settle for a satisfactory profit, some chase market share.
Profit maximisation (MR = MC) is the standard assumption, but firms can have other aims.
Revenue maximisation: produce where MR = 0, the point where TR is highest. This means a lower price and higher output than profit maximisation. Managers paid on sales may prefer it.
Profit satisficing: aim for a satisfactory profit, not the maximum. This happens when owners (shareholders) and managers are different people, and managers have their own goals.
Market share: a firm may cut prices to grow its share and push out rivals, sacrificing short-run profit for long-run dominance. Social enterprises and government-linked firms may also pursue social goals.
- Profit max
- MR = MC.
- Revenue max
- MR = 0: more output, lower price.
- Satisficing
- A satisfactory profit, not the maximum.
Worked example: Revenue with a profit target
The workshop's profits for 0 to 5 batches are -$18, $2, $14, $18, $12, -$4, and revenues $0, $30, $56, $78, $96, $110. The manager wants the highest revenue with profit of at least $10.
- Profit maximisation: 3 batches ($18 profit, $78 revenue).
- Revenue maximisation with no limit: 5 batches ($110 revenue) but a $4 loss.
- With a $10 profit floor: 4 batches ($96 revenue, $12 profit).
- Different objectives lead to different outputs from the same costs and revenues.
Watch out for this
Revenue maximisation and profit maximisation give the same output.
Revenue is highest where MR = 0, while profit is highest where MR = MC. As MC is positive, revenue maximisation means a larger output.
Check your understanding
A firm switches from profit maximisation to revenue maximisation. What happens?
- Price and output stay the same, because revenue and profit rise together.
- Output falls and price rises.
- Output rises and price falls.
Show the answer
Output rises and price falls.
Right. It moves from MR = MC to MR = 0, further along its demand curve.