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.
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.
