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