Unit 3 Complete Notes

Economic objectives of a firm
Profit maximisation – Increasing the difference between revenue and cost of production

 Short run:
Interest of shareholders are most important
Look to make MC=MR (marginal cost=marginal revenue)
SR profit maximisation implies that firms will be prepared to supply even if they
make SR loss as long as price is above Average Variable Cost (AVC)
 Long run:
Firms use cost plus pricing techniques. Price=Average Total Cost + profit, as this is
based on LR costs of firm
A firm may produce in SR even if it fails to cover its variable cost as it may think that
in the LR it is profitable.
Revenue maximisation – making the most amount of revenue per unit of output

 Managerial motive
 The larger the size of the firm, the higher is likely to be the pay and prestige of senior
managers. Revenue maximisation is a way of comparing the size and success of firms


Revenue maximisation graph
The condition for revenue maximisation is, therefore, to produce up to the point where MR
= 0. This is also at the same level of output where PED = 1, namely at the mid-point of the
average revenue/demand curve.




Maximising sales revenue is an alternative to profit maximisation and occurs when the
marginal revenue, MR, from selling an extra unit is zero. Revenue maximisation occurs when
MR=0.