Business Objectives Short Answers
- A-Level, IB
- AQA, Edexcel, OCR, IB, Eduqas, WJEC
Last updated 21 Mar 2021
In this video we ask two short questions on business objectives.
What is the difference between sales maximisation and sales revenue maximisation?
- Sales maximisation occurs when a business supplies the largest output possible consistent with earning at least normal profits.
- This happens at an output level when average revenue = average cost (or price per unit = AC)
- With sales revenue maximisation a business will expand their output to a level where marginal revenue = zero,
- This is at the mid-point of a linear demand curve and where the co-efficient of price elasticity of demand = 1
Explain how a decision to maximise sales revenue rather than profits might affect producer and consumer welfare
- Sales revenue is maximised when MR=zero whereas profits are maximised when MR=MC
- Revenues are maximised at a higher output and a lower price and will will affect producer and consumer welfare
- Using an analysis diagram, we can show that consumer surplus will be higher because of the lower price.
- But producer surplus will be lower and revenue maximisation leads to a reduction in supernormal (or abnormal) profit.
- Overall, economic welfare is likely to be greater if a business aims to maximise revenue rather than profit