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Business Objectives Short Answers

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

Economics

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