Edexcel A-Level Economics Notes | 3.2
What is profit maximisation?
Profit maximisation occurs when a firm produces at the quantity where MC=MR.
Profit can be used to pay shareholders, or for re-investment and innovation.
Explanation of the profit maximisation condition
Profit is maximised where MC = MR because at this point, the cost of producing one extra unit exactly equals the revenue it generates. If MR > MC, the firm should increase production as each additional unit adds more to revenue than costs, increasing total profit. Conversely, if MC > MR, the firm should reduce output as each additional unit costs more than it generates in revenue, reducing total profit.
What is revenue maximisation?
Revenue maximisation occurs when a firm produces at the quantity where MR=0.
Revenue maximisation can be used as a strategy to increase market share and drive competitors away.
What is sales maximisation?
Sales maximisation occurs when a firm produces at the quantity where AC=AR.
Sales maximisation could be used by a firm who want to fully exploit their economies of scale, gain market share and drive competitors away, or by a non-profit organisation.
What is profit satisficing?
Profit satisficing is when a firm makes enough profit to keep shareholders happy, but they do not make maximum profit as other stakeholders act in their own interests e.g. managers sales maximise to earn recognition.
This happens as a result of divorce of ownership from control.