Firms’ Objectives unit 3 economics DETAILED

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Firms' Objectives
Profit Maximisation
This occurs when a firm aims to aim their profits by producing at an output where supernormal
profits are at their greatest. This is where marginal costs equal marginal revenue BUT
marginal costs MUST be rising.
From the graph we can deduce that when output is 1, the marginal revenue is 0 so that means
that there is no profit from the last unit sold. The next time this occurs is at output 5.
Between these points (0 and 5) the firm is maximising its profits.
You can see this more clearly on the table below;
Output Marginal Revenue Marginal Cost Marginal Profit Total Profit
1 £10 £10 £0 £0
2 £10 £6 £4 £4
3 £10 £3 £7 £11
4 £10 £6 £4 £15
5 £10 £10 £0 £15
6 £10 £13 £3 £12
Yet this is not such an easy theory to put in practice since it is not certain that all firms know the
marginal cost of producing one more unit e.g. coffee cafes. And if they did know would they stop
selling it because the next item would result in a fall in total profit?
Also since consumers dislike price changes, the long run profit levels will be enhanced by the
maintenance of a stable price so any price changes can only occur in the long run when change in
market conditions is clear. So in the short run they can rely on price mark ups.
Firms tend to be more interested in short term profit levels, especially if they are aiming for hit and
run profits.
Sales Revenue Maximisation
This occurs when firms are willing to sell units until the next unit sold will reduce revenue. The
maximum revenue will be when marginal revenue. A good example of this is a florist at the end of the
day trying to sell her past sell by date flowers.
From the graph below we can see that as the firm expands output, marginal revenue falls. BUT MR is
still positive as it is still gradually adding small amounts to total revenue. When MR passes 0 and
becomes negative this is when total revenue falls.

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Page 2

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This tends to be a better strategy for firms since they are more likely to have a bigger market share
if they adopt sales revenue maximisation rather than profit maximisation.
Sales Volume Maximisation
This occurs when a firm wants to maximise the number of units sold and in turn maximise their
share in the market. The sales volume maximisation occurs where AC=AR=D.…read more

Page 3

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This economic theory was developed by the US economist Herbert Simon. He argued that the
decision making within a firm results from the interaction between many competing groups with a
firm. As they have conflicting views the best solution is satisficing. This is a compromise between the
different groups in which the firm will see as satisfactory.…read more



This is a 4 page summary of the objectives of firms including some of the required graphs.

Angus Cheetham

About the graph for profit maximising, isnt the MC and MR lines the other way round?

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