Business objectives shape firm behaviour and decision-making. This section explores three key objectives—profit, revenue, and sales maximisation—using diagrams and core economic formulae.
Profit maximisation
Profit maximisation is the traditional objective of firms in neoclassical economics. It refers to producing at the level of output where the firm earns the greatest possible difference between its total revenue and total cost. This occurs at the output level where marginal cost (MC) equals marginal revenue (MR). Any output lower or higher than this point would result in lower overall profit.
Diagrammatic representation
In a profit-maximisation diagram, the following curves are drawn:
Average revenue (AR): This is also the demand curve and is typically downward sloping in imperfect competition.
Marginal revenue (MR): Falls at twice the rate of the AR curve and lies beneath it.
Average cost (AC): U-shaped due to economies and diseconomies of scale.
Marginal cost (MC): Also U-shaped and intersects the AC curve at its lowest point.
The point where MC = MR is the profit-maximising output (Qp). From this output level, a vertical line is drawn to intersect the AR and AC curves to determine the price (Pp) and cost per unit respectively.
Key features on the diagram
Profit-maximising output (Qp): This is where the MC and MR curves intersect. At this point, the firm has no incentive to either increase or decrease output.
Price (Pp): Found by projecting Qp upwards to the AR curve.
Total revenue (TR): Calculated as price (Pp) multiplied by quantity (Qp). This is represented as the area of the rectangle Pp × Qp.
Total cost (TC): Determined by multiplying the average cost at Qp by the quantity (AC × Qp).
Profit area: This is the shaded rectangle between AR and AC at the level of output Qp.
Relevant formulae
Total Revenue (TR) = Price (P) × Quantity (Q)
Average Revenue (AR) = TR / Q
Marginal Revenue (MR) = Change in TR / Change in Q
Total Cost (TC) = Fixed Costs (FC) + Variable Costs (VC)
Profit = TR – TC
Real-world relevance
Profit maximisation is typically associated with firms that are either:
Trying to maximise shareholder returns
Operating in mature or saturated markets where growth potential is limited
Focused on efficiency and cost control
Examples include:
Apple Inc., which maintains high prices to maximise profitability through brand strength.
Pharmaceutical companies, which charge high prices to compensate for research and development costs.
From a consumer standpoint, profit maximisation can lead to:
Higher prices
Reduced output
Lower consumer surplus
It can also result in reduced innovation if firms lack competitive pressure to enhance quality or invest in R&D.
Revenue maximisation
Revenue maximisation refers to the objective of generating the highest possible total revenue, without necessarily considering costs. A firm may pursue this goal to expand market share, drive out competitors, or increase perceived value. It occurs at the output level where marginal revenue (MR) equals zero.
Diagrammatic representation
In the diagram for revenue maximisation, the key feature is that:
The MR curve crosses the x-axis, and the point where MR = 0 is the revenue-maximising output (Qr).
The AR curve remains downward sloping.
The AC and MC curves may be present, but they are not the primary focus unless profit is being evaluated.
At the point of MR = 0, total revenue is at its maximum, since any further increase in output would lead to a fall in TR (as MR would be negative).
Key features on the diagram
Revenue-maximising output (Qr): Found where MR = 0.
Price (Pr): Taken from the AR curve at Qr.
Total Revenue (TR): Calculated using TR = Pr × Qr.
Marginal Revenue: Equals zero at this point.
Although the firm is not explicitly seeking profit, it may still make a profit depending on the position of the AC curve at Qr.
Relevant formulae
Total Revenue (TR) = P × Q
Marginal Revenue (MR) = ΔTR / ΔQ
Average Revenue (AR) = TR / Q
Real-world relevance
Firms may choose revenue maximisation for strategic reasons:
Start-ups aiming for fast growth
Firms trying to establish brand dominance
Companies wanting to deter potential entrants
Notable examples include:
Facebook (Meta): Focuses on increasing advertising revenue by expanding user engagement.
Uber: Uses aggressive pricing to increase revenue and establish a dominant market position, even at the cost of short-term profits.
From a consumer point of view:
Prices may be lower than under profit maximisation.
Output is higher, potentially increasing consumer welfare.
However, if the firm neglects profitability, it might face long-term sustainability issues.
Sales maximisation
Sales maximisation refers to the goal of selling as many units as possible while still making normal profit. A firm aims to maximise volume without incurring a loss. The key condition for sales maximisation is that average revenue (AR) equals average cost (AC).
Diagrammatic representation
The diagram for sales maximisation includes:
AR and AC curves intersecting at the output level where AR = AC.
This intersection determines the sales-maximising output (Qs).
At this output, the firm earns normal profit, meaning economic profit is zero (TR = TC).
MC and MR curves are typically not central in this diagram unless profit analysis is included.
Key features on the diagram
Sales-maximising output (Qs): Found where AR = AC.
Price (Ps): Located at the AR curve at Qs.
TR = TC: Since AR = AC, and both are multiplied by Qs, revenue and cost are equal.
Profit = 0: Only normal profit is made.
This approach reflects a situation where the firm is not seeking to make excess profit but aims to increase sales volume.
Relevant formulae
Total Revenue (TR) = P × Q
Average Revenue (AR) = TR / Q
Total Cost (TC) = FC + VC
Profit = TR – TC = 0 at this point
Real-world relevance
Firms may pursue sales maximisation for several reasons:
To gain economies of scale
To improve market visibility and share
To satisfy managerial performance targets based on sales volume rather than profitability
Examples include:
Amazon: Frequently prioritises sales growth over profitability, especially in new markets or during key sales events.
Supermarkets such as Tesco or Sainsbury’s, which use loss leaders or discounted bulk sales to attract high volumes of customers.
Consumers often benefit from:
Lower prices
Greater product availability
However, long-term quality or service standards may suffer if profitability is not ensured.
Comparing business objectives
Different business objectives result in different outcomes in terms of pricing, output, and consumer impact. The choice of objective reflects a firm’s strategic priorities and external pressures such as market competition or stakeholder demands.
Output and pricing implications
Profit maximisation:
Lowest output (Qp)
Highest price (Pp)
Highest profit
Potentially lower consumer surplus
Revenue maximisation:
Higher output than Qp
Medium price (Pr)
Lower profit than Qp
Higher consumer surplus
Sales maximisation:
Highest output (Qs)
Lowest price (Ps)
Normal profit (TR = TC)
Maximum consumer surplus
Economic implications
As a firm moves from profit to revenue to sales maximisation:
Output increases
Price decreases
Profit declines, eventually reaching zero in the case of sales maximisation
Consumer welfare often improves due to lower prices and more availability
However, allocative and productive efficiency may be compromised depending on the market structure
Strategic flexibility
Firms may change their objectives over time due to:
Stage in the business lifecycle (e.g. start-ups focusing on growth)
Competitive pressures (e.g. new entrants forcing price wars)
Stakeholder influence (e.g. investors pushing for profitability or managers pursuing sales targets)
Understanding these shifts is crucial in evaluating firm behaviour and market outcomes in both theoretical and real-world contexts.
Real-world examples of each objective
Profit maximisation:
Apple
Pharmaceutical companies
Revenue maximisation:
Meta (Facebook)
Uber
Sales maximisation:
Amazon
Tesco, Sainsbury’s
These examples highlight how theory translates into practical business strategies, often influenced by market structure, consumer demand, and long-term planning. Firms rarely pursue a single objective in isolation and often alternate between them depending on internal and external circumstances.
FAQ
In imperfect competition, such as monopolistic or oligopolistic markets, the firm faces a downward-sloping demand curve, which is also its average revenue (AR) curve. To sell additional units, the firm must lower the price, not just for the additional unit but for all previous units sold. As a result, marginal revenue (MR)—the additional revenue from selling one more unit—falls more rapidly than average revenue. This is because the loss in revenue from lowering the price on all previous units outweighs the gain from the extra unit sold. Mathematically, if the AR curve is linear, the MR curve will have the same vertical intercept but twice the gradient, crossing the quantity axis at half the output level of the AR curve. This concept is vital in understanding revenue behaviour in non-price-taking firms and helps explain why profit maximisation (where MC = MR) occurs at a lower quantity than revenue maximisation (where MR = 0).
Normal profit represents the minimum level of profit needed to keep a firm in its current line of production. It is the opportunity cost of capital and entrepreneurial effort. In the context of sales maximisation, a firm seeks to maximise the quantity sold subject to the constraint of earning at least normal profit. This means the firm covers all its explicit and implicit costs, including the income the owners could earn elsewhere. It occurs at the output level where average revenue (AR) equals average cost (AC). This output level is greater than that of profit or revenue maximisation, leading to higher consumer access and market penetration. The concept is significant because it distinguishes between covering costs and generating surplus. While sales maximisation may reduce short-term profit, it can be strategically useful for increasing brand loyalty, achieving economies of scale, and deterring entry. However, if a firm fails to make even normal profit in the long run, it will exit the market.
A firm’s cost structure—specifically the proportion of fixed and variable costs—has a strong influence on its flexibility in shifting business objectives. Firms with high fixed costs, such as those in manufacturing or telecommunications, often need to ensure consistent revenue to cover these expenses, making profit or revenue maximisation more pressing. In contrast, firms with higher variable costs may have more operational flexibility and may more easily adopt sales maximisation without risking financial instability. For example, if fixed costs are substantial, pursuing sales maximisation at lower prices may not generate enough revenue to cover total costs, especially in the short term. Additionally, the time horizon matters: in the short run, fixed costs cannot be adjusted, limiting adaptability. In the long run, as costs become more variable, firms can realign their strategies more effectively. Therefore, the structure and nature of costs are critical in determining how easily a firm can transition between objectives such as profit, revenue, or sales maximisation.
In theory, a profit-maximising firm will produce where marginal cost (MC) equals marginal revenue (MR). However, in practice, achieving this equality is often difficult due to several real-world complications. Firstly, firms may lack perfect information about their cost and revenue curves. Accurately calculating marginal changes in cost and revenue requires precise and up-to-date data, which may not always be available. Secondly, production is not always infinitely divisible, especially in manufacturing, where output increases in batches or steps rather than smooth increments. Thirdly, firms may face adjustment costs or delays, making it difficult to align output perfectly with theoretical conditions. Additionally, firms often pursue multiple objectives simultaneously—such as maintaining market share or satisfying stakeholders—which can override strict profit-maximising behaviour. Uncertainty, external shocks, and behavioural biases may further cause deviations. Therefore, while MC = MR remains a guiding principle, actual business decisions frequently involve approximations, estimations, and compromises.
Elasticity of demand significantly influences a firm’s pricing and output decisions under different business objectives. In profit maximisation, if demand is inelastic, a firm can raise prices without losing many sales, increasing total revenue and profit. In this case, the firm may produce less output but enjoy high margins. In contrast, under elastic demand, raising prices leads to a proportionately larger fall in quantity demanded, making a high-volume, low-margin approach more profitable. For revenue maximisation, the key is operating at the unit elastic point—where marginal revenue equals zero. At this point, the percentage change in price equals the percentage change in quantity, meaning total revenue is maximised. For sales maximisation, more elastic demand benefits the firm, as lower prices lead to a proportionally larger increase in quantity sold, aiding in achieving higher volumes while still covering average costs. Hence, understanding demand elasticity is crucial for firms in selecting and evaluating the effectiveness of each business objective.
Practice Questions
Using a diagram, explain how a firm maximises its profit.
A firm maximises profit where marginal cost (MC) equals marginal revenue (MR). At this point, the cost of producing an additional unit equals the revenue it generates, ensuring no profit is lost or forgone. The firm determines this output level and uses the demand curve (average revenue, AR) to set the corresponding price. The area between AR and average cost (AC) at the profit-maximising output shows the firm’s supernormal profit. This objective is common in firms aiming to increase shareholder returns. It assumes rational behaviour and perfect knowledge of costs and revenues, which may not always hold in reality.
Evaluate the potential implications for consumers if a firm switches from profit maximisation to sales maximisation.
If a firm shifts from profit to sales maximisation, it will increase output to the point where average revenue equals average cost. This leads to lower prices and greater output, increasing consumer surplus and access to goods. However, the firm only earns normal profit, which might reduce incentives for innovation or quality improvement in the long run. Consumers benefit from affordability, but if the firm faces long-term financial strain, service levels may deteriorate. The impact depends on the firm’s cost structure and market conditions. In competitive markets, the switch may improve efficiency, but risks exist if sustainability is compromised.
