Cambridge International as and a level Economics Ebook

sales revenue maximisation
might 
be chosen in a large fi rm is that management salaries 
might be linked to the value of sales. Shareholders might 
be more interested in profi t. Th
e solution to this confl ict of 
interests is to off er management some shares as a bonus or 
to link their salaries to profi ts.
Sales revenue maximisation: 
a firm’s objective to 
maximise turnover.
KEY TERM
Sales maximisation
Th
is option maximises the 
volume
of sales rather than 
the sales revenue. In 
sales maximisation
the fi rm would 
increase output up to the break-even output where the total 
revenue just covered the total cost. A higher output than 
this implies loss-making behaviour. Th
e only situation 
where this would be possible is where the fi rm could use 
the profi t from some other activities to cover these losses. 
Th
is is referred to as cross-subsidisation. It could be that a 
state-owned fi rm, such as one running local bus services, 
uses the profi ts from city services to retain lower density 
routes that are loss-making. In this case there are social 
objectives lying behind price and output decisions. Th
e 
company might be instructed to keep prices down, to cover 
their ATC, or to make suffi
cient profi t to be self-fi nancing 
when it comes to new investment.
Sales maximisation: 
a firm’s objective to maximise the 
volume of sales.
KEY TERM
A fi rm in the private sector would not go beyond the break-
even output in order to expand sales unless it is part of a 
diversifi ed grouping where cross-subsidisation is being 
practised. If it did, then it would be making fewer profi ts. 
10
9
8
7
6
5
4
3
2
1
1
2
3
4
5
6
7
8
9
10
Output
1
2
3
4
5
6
7
8
9
10
0
Price (US$)
PED = 1
PED > 1
PED < 1
D = AR
25
20
15
10
5
0
TR
TR at its maximum
PED < 1
PED > 1
Revenue data
Units
Price sold 
TR
MR
(
P
) (
Q
) (
P
x 
Q
)
10
0 0
9 1 9
8 2 16
7 3 21
6 4 24
5 5 25
4 6 24
3 7 21
2 8 16
1 9 9
9
7
5
3
1
–1
–3
–5
–7
}
MR
= 0
Output