Draw the profit-, revenue- and sales-maximising outputs on one diagram and name the rule for each
6 min
4 questions
Key terms
Sales maximisation
Sales maximisation is producing the largest output a firm can sell without making a loss, where average revenue equals average cost.
Revenue maximisation
Revenue maximisation is producing the output at which total revenue is as large as possible, where marginal revenue is zero.
A revenue maximiser makes more and charges less than a profit maximiser
1 of 3
Revenue and costAverage revenue AR, marginal revenue MR, marginal cost MC and average cost AC.
Moving down AR from the profit-maximising point P1, Q1 to the revenue-maximising point P2, Q2, output rises and price falls.
A profit maximiser makes Q1, where MR = MC. Up to Q1 each extra unit adds more to revenue than to cost; past it the next unit costs more than it brings in. Price P1 is read off AR, and supernormal profit is area A.
A revenue maximiser ignores cost and makes Q2, where MR = 0. Up to Q2 each extra unit adds to total revenue; past it MR is negative and total revenue falls.
Marginal cost is above zero, so MR meets MC before it reaches zero: Q2 lies to the right of Q1, and P2 below P1.