Cambridge International as and a level Economics Ebook

Other objectives of firms
Dissatisfaction with the traditional assumption of profi t 
maximisation has led to a number alternative objectives 
being put forward to explain how fi rms behave. Th
ese are 
invariably based on empirical investigation and are referred 
to as managerial or behavioural objectives of fi rms.
Sales revenue maximisation
Figure 7.24,
which is derived from the accompanying 
data, shows that when the price changes from $9 to $8, 
the marginal revenue is 7. Th
e addition to total revenue 
is gradually falling as the price falls until when fi ve units 
are sold MR 
=
0. At this point total revenue or sales is 
maximised.
In the above example, the fi rm would be facing a 
straight-line demand curve. Even so, the consumers’ 
reaction to a price change varies at diff erent prices due 
to the way in which the price elasticity of demand (PED) 
varies along the demand curve.
As the price falls in steps from $10, sales increase more 
than proportionally, giving PED a value greater than 1, 
until the output of 5 when total revenue is unchanged. Th
is 
gives a PED value of 1. Beyond this output PED has a value 
less than 1 and the result is that further price cuts will 
reduce total revenue.
A relationship between price elasticity and marginal 
revenue can also be seen. In the elastic part of the demand 
curve where PED > 1, the marginal revenue is positive and 
total revenue will be increasing as output increases. When 
the PED 
=
1, MR will be zero and total revenue will be 
maximised. When PED < 1, MR will be negative, reducing 
the total revenue.
Th
e most important thing about the concept of price 
elasticity from the fi rm’s point of view is that it determines 
what happens to total revenue when the price is altered. 
It would make sense for any fi rm operating in the elastic