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Business objectives: profit, revenue and sales maximisation, satisficing

Edexcel IAL Economics · WEC13 Business behaviour

Traditional theory assumes firms maximise profit, but managers may pursue other goals. Each objective gives a different output and price, and each has a simple rule you must be able to state and use.

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Profit maximisation: MC = MR

Profit = total revenue - total cost. Profit is maximised where marginal cost = marginal revenue (MC = MR), with MC rising through MR.

Why: if MR > MC, the next unit adds more to revenue than to cost, so profit rises by producing it; if MR < MC, the last unit lost money, so cut output. Only at MC = MR is no further gain possible.

Revenue maximisation: MR = 0

Total revenue is highest where MR = 0. Beyond that point, selling another unit needs such a price cut that revenue falls. On a straight-line demand curve this is the midpoint, where PED = -1 (unitary elasticity). Managers may chase revenue because their pay or status is linked to turnover.

Sales volume maximisation: AR = AC

Sales maximisation means selling as many units as possible without making a loss, so the firm still covers its costs including normal profit. It expands output until AR = AC (price equals average cost). Aims: market share, deterring entry, or economies of scale.

Satisficing

In the behavioural theory of the firm, firms are coalitions of groups (shareholders, managers, workers, customers) with different goals. Rather than maximise one thing, managers aim for a satisfactory level of profit that keeps shareholders content while meeting other groups' goals. Satisficing is likely when ownership and control are separated and information is imperfect.

Diagram in words: draw downward-sloping AR and a steeper MR (twice the slope) and a U-shaped AC with MC cutting it at its minimum. Mark Q1 where MC = MR (profit max), Q2 where MR crosses the output axis (revenue max), and Q3 where AR cuts AC on the right (sales max). Usually Q1 < Q2 < Q3.

Worked example

A firm faces demand P = 60 - 2Q and constant MC = AC = $20. Find the profit-maximising, revenue-maximising and sales-maximising outputs.

  1. TR = 60Q - 2Q2, so MR = 60 - 4Q.
  2. Profit max: MR = MC gives 60 - 4Q = 20, so Q = 10 and P = $40.
  3. Revenue max: MR = 0 gives Q = 15 (P = $30).
  4. Sales max: AR = AC gives 60 - 2Q = 20, so Q = 20.

Answer: Q = 10 (profit), 15 (revenue), 20 (sales volume).

Key idea: Profit max: MC = MR. Revenue max: MR = 0. Sales volume max: AR = AC. Satisficing: a satisfactory profit while meeting other stakeholders' goals.

Check yourself

  1. A firm faces demand P = 80 - 2Q, so MR = 80 - 4Q. MC is constant at $16. Find the profit-maximising output.
    Show answer

    16 units. MR = MC: 80 - 4Q = 16, so 4Q = 64 and Q = 16.

  2. For the same firm (P = 80 - 2Q, MC = $16), find the profit-maximising price.
    Show answer

    $48. Q = 16, so P = 80 - 2(16) = $48. Read price from the demand (AR) curve, not from MR.

  3. Demand is P = 80 - 2Q. Find the revenue-maximising output.
    Show answer

    20 units. MR = 80 - 4Q = 0 gives Q = 20.

  4. Demand is P = 80 - 2Q and average cost is constant at $16. Find the sales-maximising output.
    Show answer

    32 units. AR = AC: 80 - 2Q = 16, so Q = 32.

  5. A firm produces where MR = $12 and MC = $9. To increase profit it should
    • reduce output
    • keep output the same
    • increase output
    • shut down
    Show answer

    increase output. The next unit adds $12 to revenue but only $9 to cost, so profit rises if output increases.

  6. Satisficing is most likely when
    • ownership is separated from control in a large company
    • a sole trader owns and runs the business
    • the market is perfectly competitive
    • the firm has perfect information about costs and demand
    Show answer

    ownership is separated from control in a large company. Managers who do not own the firm can aim for 'enough' profit while pursuing other goals.

  7. At the revenue-maximising output on a straight-line demand curve, price elasticity of demand is
    • zero
    • greater than 1 in size
    • -1 (unitary)
    • infinite
    Show answer

    -1 (unitary). MR = 0 at the midpoint of a linear demand curve, where |PED| = 1.

  8. On the standard diagram, how do the outputs usually compare?
    • Sales max < revenue max < profit max
    • Revenue max < profit max < sales max
    • They are always equal
    • Profit max < revenue max < sales max
    Show answer

    Profit max < revenue max < sales max. MC = MR comes first, MR = 0 next, and AR = AC furthest to the right.

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Last updated 8 November 2026. Spotted a mistake? Tell us.