Neoclassical theory assumes firms maximise profit. Edexcel 3.2 asks you to know the profit-maximising rule (MC = MR), the alternatives — revenue maximisation, sales maximisation and satisficing — the diagrams for each, and why firms deviate: the divorce of ownership from control.
Answer the questions as you go — including four calculations — and collect ⭐ stars. Press Start.
Profit is π = TR − TC. Profit is at a maximum where the gap between TR and TC is widest — which is exactly where the extra revenue from the last unit equals its extra cost.
The marginal logic is the whole of A-level microeconomics in two lines:
Exam craft: "profit maximisation" is a rule about the margin, not about charging the highest possible price. A profit-maximising monopolist that raised price further would sell so much less that profit would fall.
With a downward-sloping AR (demand) curve, MR falls twice as steeply. That single fact generates all three output levels:
Learn the ordering: the profit-maximising output is always the smallest and carries the highest price; sales maximisation gives the largest output and the lowest price. That is the key evaluation point for consumers.
A firm faces the demand curve P = 20 − Q (P in £, Q in thousands of units). Its marginal cost is constant at £4 and its fixed costs are £20 (thousand).
AR = P = 20 − Q, so TR = P × Q = 20Q − Q².
MR is the slope of TR: MR = 20 − 2Q — same intercept (20), twice the slope.
20 − 2Q = 4 → 2Q = 16 → Q = 8
Price: P = 20 − 8 = £12 · TR = 12 × 8 = £96
TC = fixed + variable = 20 + (4 × 8) = £52
Profit = 96 − 52 = £44 (thousand)
Skill to bank: for any linear demand curve P = a − bQ, MR = a − 2bQ. Examiners use this constantly.
Same firm: demand P = 20 − Q, so MR = 20 − 2Q. Marginal cost is constant at £4.
At the profit-maximising output of Q = 8, price is £12. Fixed costs are £20 and marginal (= average variable) cost is £4 per unit.
Total revenue is at a maximum when the last unit adds nothing to revenue — i.e. where MR = 0. Beyond that, MR is negative and TR falls.
This links straight back to PED (Theme 1):
Why would a firm do it? Managers' bonuses are often tied to turnover; sales staff are on commission; and a bigger revenue base can deter entry and build market presence.
Crucial: a revenue-maximising firm produces more and charges less than a profit maximiser — and makes less profit. Revenue is not profit.
Same firm: MR = 20 − 2Q.
Sales maximisation means selling the largest possible volume subject to a constraint: the firm must still cover its costs — that is, it must at least make normal profit.
Push output any further and AC would exceed AR: the firm would make a loss and could not survive in the long run. So AR = AC is the break-even boundary.
Precision matters: "sales maximisation" (largest output subject to normal profit, AR = AC) is not the same as "revenue maximisation" (MR = 0). Sales max gives a larger output and a lower price than revenue max.
Satisficing (Herbert Simon) means aiming for an outcome that is "good enough" rather than maximal — sacrificing some profit to keep all stakeholders sufficiently content.
Satisficing typically arises because of the divorce of ownership from control: managers who are not the owners have no strong incentive to squeeze out the last pound of profit, only enough to keep shareholders from revolting.
Tap a statement, then tap the objective it describes.
Why would any firm not maximise profit? Because in a large company the people who own it (shareholders — the principals) are not the people who run it (managers — the agents).
Partial solutions: pay managers in share options or performance-related pay to align incentives; the threat of hostile takeover disciplines under-performing boards. But share options can encourage short-termism — pumping this year's share price at the expense of long-run investment.
A firm's total revenue and total cost (£000s) at each output are:
| Output (000s) | 1 | 2 | 3 | 4 | 5 | 6 |
|---|---|---|---|---|---|---|
| Total revenue | 18 | 34 | 48 | 60 | 70 | 78 |
| Total cost | 20 | 26 | 34 | 44 | 58 | 76 |
Q=1: 18 − 20 = −2 · Q=2: 34 − 26 = 8 · Q=3: 48 − 34 = 14
Q=4: 60 − 44 = 16 ← maximum · Q=5: 70 − 58 = 12 · Q=6: 78 − 76 = 2
3 → 4: MR = 60 − 48 = 12, MC = 44 − 34 = 10. MR > MC, so make the 4th unit.
4 → 5: MR = 70 − 60 = 10, MC = 58 − 44 = 14. MR < MC, so do not make the 5th.
Profit therefore peaks at Q = 4 — the two methods must always agree.
Note also: revenue is still rising at Q = 6 (MR = 78 − 70 = 8 > 0), so a revenue maximiser would produce well beyond Q = 4. Different objective, different output.
Tap a condition on the left, then the objective on the right.
Profit maximisation: MC = MR (smallest output, highest price, most profit)
Revenue maximisation: MR = 0 (unit elastic demand, PED = 1)
Sales maximisation: AR = AC (largest output, lowest price, normal profit only)
Satisficing: "good enough" for all stakeholders; bounded rationality
Ordering: Q(profit max) < Q(revenue max) < Q(sales max)
Why firms deviate: divorce of ownership from control → principal–agent problem
Maths: for P = a − bQ, MR = a − 2bQ
You've covered the whole of Edexcel 3.2. Press Finish to see your score.
You've worked through Business objectives for Edexcel A-level Economics A. 🎉
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Next: test yourself in the Evaluate stage Confidence Quiz, then lock it in with Verify.