Economics starts by assuming every firm chases maximum profit. Look at real companies and you find some chasing market share, some settling for “good enough”, and some spending money on things that cut profit on purpose. Here is how each objective changes the output the firm picks — and why examiners love that one diagram.
📚 What you need to know
Profit maximisation happens where MC = MR. This is the assumed objective in most models.
Revenue maximisation happens where MR = 0 — total revenue stops rising, so producing more would shrink it.
Sales maximisation happens where AC = AR — the firm breaks even, making normal profit and nothing more.
Each objective sits at a higher output and a lower price than the one before it.
Satisficing means aiming for an acceptable result rather than the best one, often because of the principal–agent problem.
Corporate social responsibility (CSR) means running the business ethically and balancing shareholders against the wider community.
Marks are lost on the diagram, not the theory. Practise drawing MC, AC, AR and MR until it is automatic.
Profit maximisation: why MC = MR
Marginal cost is what the next unit adds to costs. Marginal revenue is what it adds to revenue. So the logic is almost embarrassingly simple: if the next unit brings in more than it costs, make it. Keep going until the next unit no longer pays for itself. That moment is MC = MR.
MC = MR is not a magic formula. It is simply the point where you stop, because the next unit would cost more than it earns.
Profit maximisation tells you the quantity first. The price comes second — you go up from that quantity to the AR curve to read it off. Students who look for price straight away always end up reading the wrong number.
The three output levels on one diagram
This is the diagram that decides the marks in this topic. The same firm, the same curves, three different objectives — and each one pushes output further right and price further down.
Move right along the AR curve and price falls every time. That is why a firm chasing market share charges less than a firm chasing profit.
🧩 How to read profit off this diagram
Find the quantity first. For profit maximisation, look for where MC cuts MR, then drop a line to the quantity axis.
Go straight up to AR from that quantity. Where you hit AR is the price.
Read AC at the same quantity. That is the cost per unit.
Profit per unit = price − AC. Shade the rectangle between them.
Total profit = (price − AC) × quantity — the area of that rectangle.
Growth: revenue and sales maximisation
Not every firm wants the biggest profit this year. A firm trying to grow wants output and market share, and both objectives push it past the profit-maximising point.
Revenue maximisation (MR = 0)
As long as marginal revenue is positive, one more unit still adds to total revenue. Once MR reaches zero, total revenue has peaked. Selling more after that would actually shrink revenue, because the price cut needed to shift the extra units costs more than the units bring in.
Sales maximisation (AC = AR)
Here the firm pushes output as far as it possibly can while still covering all its costs. At AC = AR the firm breaks even, earning normal profit only. Price is at its lowest, which makes life hard for rivals — useful for grabbing share or clearing stock.
Normal profit is not zero profit. Normal profit means revenue exactly covers all costs including the opportunity cost of the owner’s money. The firm is doing well enough to stay in the industry — it just is not earning anything extra.
Satisficing and the principal–agent problem
Satisficing means aiming for an outcome that is satisfactory rather than optimal. A sole trader might satisfice because they would rather finish at five and see their family. A large company usually satisfices for a different and more interesting reason.
In a big firm the owners (shareholders) are not the managers. The owners are the principals; the managers are their agents. Shareholders want profit maximised because profit becomes dividends and a higher share price. Managers are often paid and promoted on sales, revenue or the size of the business, so they lean towards growth. That clash of interests is the principal–agent problem.
Since the managers actually run the firm day to day, output usually settles somewhere between profit maximisation and sales maximisation — enough profit to keep shareholders quiet, enough growth to suit the managers.
There is a second reason for satisficing that examiners like: firms genuinely do not know where MC = MR. Working it out needs cost and demand data nobody has in real time. This is bounded rationality applied to firms.
Corporate social responsibility
CSR means running the business in an ethical way and weighing shareholder interests against those of workers, customers, communities and the environment. Firms publish responsibility reports, commit to sustainable sourcing, avoid marketing to children, or reward customers who bring a reusable cup.
Why firms do it
Why it can backfire
Improves brand image, which can raise demand and make it less price elastic
It costs money now, and those costs are usually passed on to consumers as higher prices
Attracts and keeps better staff, raising productivity
Benefits are hard to measure, so it is difficult to justify the spending to shareholders
Can head off tougher regulation later by acting first
If the commitment is not genuine, the firm gets accused of greenwashing, which damages the brand more than doing nothing
Worked examples
WORKED EXAMPLE 1
A firm faces AR = 60 − 0.5Q and MR = 60 − Q. Its marginal cost is MC = 10 + 0.25Q and its average cost at the chosen output is 22.5. Find the profit-maximising output, the price, and total supernormal profit. [4]
Step 1: set MC = MR10 + 0.25Q = 60 − Q1.25Q = 50, so Q = 40Step 2: find the price from AR, not MRP = 60 − 0.5(40) = 60 − 20 = 40Step 3: profit per unit40 − 22.5 = 17.5Step 4: total profit17.5 × 40 = 700Q = 40 units, P = 40, supernormal profit = 700The classic error is reading price off MR. MR only gives you the quantity.
WORKED EXAMPLE 2
Using the same firm, find the revenue-maximising output and show that revenue is higher there than at the profit-maximising output. [3]
Step 1: revenue is maximised where MR = 060 − Q = 0, so Q = 60Step 2: price at that outputP = 60 − 0.5(60) = 30Step 3: compare total revenueAt Q = 60: TR = 30 × 60 = 1800At Q = 40: TR = 40 × 40 = 1600Revenue max at Q = 60, TR = 1800 — higher than 1600Revenue is higher, but profit is lower. That trade-off is the whole point of the topic.
💡 Exam tip
Quantity first, price second. Every objective identifies an output level; the price is read off AR afterwards.
MR is twice as steep as AR when AR is a straight line, and it hits the quantity axis at half the AR intercept. Use that to draw quickly.
Label everything: MC, AC, AR = D, MR, the price, the output and the axes. Unlabelled diagrams lose easy marks.
Remember the order: profit max output < revenue max output < sales max output, with price falling each time.
For evaluation, ask who benefits. Sales maximisation is good for consumers now but may weaken the firm’s investment later.
Use the principal–agent problem by name. It is a specific term and it earns credit.
⚠️ Common mix-up
Reading price off the MR curve. Price always comes from AR.
Confusing revenue maximisation with sales maximisation. MR = 0 is revenue; AC = AR is sales, and it is further right.
Thinking normal profit means no profit. It means just enough to keep the firm in the industry.
Assuming satisficing is laziness. It is often a rational response to not knowing where MC = MR.
Saying CSR always cuts profit. It can raise profit through brand loyalty and staff retention — say “may reduce short-run profit”.
Drawing MR through the same intercept as AR but with the same slope. It must be steeper.
Up next: Price Elasticity of Demand — we have just said a firm chasing revenue must know what a price change does to quantity. PED is the tool that measures exactly that.
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