Edexcel A-Level Economics A (9EC0) · Theme 3
Specification points
- Profit maximisation and the condition MC = MR.
- Alternative objectives: revenue maximisation, sales maximisation, satisficing.
Profit maximisation
The traditional assumption is that firms maximise profit, which occurs where marginal cost equals marginal revenue (MC = MR). Producing beyond this point adds more to cost than revenue; producing less forgoes profit.
Profit is maximised where MC = MR.
Key definitions
| Term | Definition |
|---|---|
| Profit maximisation | Producing where MC = MR to earn the greatest profit. |
| Revenue maximisation | Producing where marginal revenue = 0 (maximum total revenue). |
| Sales maximisation | Selling the most output while still making normal profit. |
| Satisficing | Achieving a satisfactory rather than maximum outcome to balance stakeholders. |
Alternative objectives
Firms may not maximise profit because of the principal-agent problem or wider aims:
- Revenue maximisation — where MR = 0; managers' pay or status may depend on revenue.
- Sales (volume) maximisation — the largest output consistent with normal profit (break-even); useful for market share.
- Satisficing — earning "enough" profit to keep shareholders happy while pursuing other goals (an easy life, ethical aims).
- Survival, growth or social/ethical objectives.
Worked example
A new streaming firm cuts prices to maximise sales and build market share, accepting only normal profit for now. Once dominant, it may switch to profit maximisation (MC = MR) and raise prices. The objective changes with the firm's stage and market position — a strong evaluation point.
Common exam mistakes
- Stating profit is maximised where total revenue is highest (it is where MC = MR).
- Confusing revenue maximisation (MR = 0) with sales maximisation (normal profit).
- Assuming firms always profit-maximise.
Exam technique
Identify the objective, place it on a cost/revenue diagram (the output where the relevant condition holds), and evaluate why a firm might pursue it over profit maximisation.
Quick revision
- Profit max: MC = MR. Revenue max: MR = 0. Sales max: normal profit.
- Satisficing balances stakeholders; objectives change over time.