Cambridge International as and a level Economics Ebook

part of the demand curve to reduce price and boost total 
revenue. Conversely, in the inelastic part, the fi rm should 
raise its price if it wants to see higher revenue. In this 
Cost and r
evenue
Output
MC
Q
MR
MC > MR
Profit max output
MC = MR
Profit margin
Loss on each
successive unit
MR > MC
Figure 7.23 
The profit maximisation rule
SELF-ASSESSMENT TASK 
7.15
Self-assessment task 3.1 considered the case for 
introducing maximum price for essential commodities 
in Kenya. Th
is has occurred because the government 
has been unable to enforce its competition law 
forbidding the operation of cartels. Th
ere is a generally 
held view that large suppliers have been colluding and 
charging exorbitant prices for their commodities to 
exploit consumers and so earn massive profi ts. It is 
fi rmly believed that the formation of these cartels is a 
major contributing reason for high consumer prices.
1 
Using a diagram,
 
explain how a cartel is able to 
charge high prices.
2 
Comment on why the Kenyan government 
has been unable to enforce its competition law 
forbidding the operation of cartels.
3
Discuss the extent to which the benefi ts of cartels 
like those in Kenya might off set the exorbitant 
prices charged.
179
Chapter 7: The price system and the microeconomy 

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example revenue is maximised at fi ve units of output with a 
price of $5. Th
is in itself is a reasonable objective for a fi rm 
to have; it is, however, not the same as profi t maximisation.
A fi rm may be prepared to accept a lower price and 
produce above the profi t-maximising output in order to 
increase its market share in a growing market. Th
is is a 
penetration pricing policy. A fi rm choosing to maximise 
its sales revenue would raise output beyond MC 
=
MR 
until MR had fallen to zero. Extra sales aft er this would 
contribute nothing to total revenue, therefore revenue is 
at its maximum. Th
ere may still be abnormal profi t if total 
revenue is higher than total cost but this is not always the 
case. Th
e reason why