Business objectives — Edexcel A-Level Economics A
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Business objectives explained
This objective requires you to use diagrams and formulae to show three business objectives.
Read the full explanation
For profit maximisation, the firm produces where marginal cost equals marginal revenue (MC = MR); the vertical gap between total revenue and total cost is greatest there, and the diagram shows the MC and MR curves crossing with output read down to the quantity axis. For revenue maximisation, the firm produces where marginal revenue equals zero (MR = 0), because total revenue peaks when an extra unit adds nothing; on the diagram this is where the MR curve meets the horizontal axis. For sales maximisation, the firm produces where average revenue equals average cost (AR = AC), the highest output at which normal profit is still earned; the diagram shows the AR and AC curves intersecting. Formulae link these: profit = TR − TC, and each objective is identified by its equality condition.
Your focus
- State the equality condition that identifies profit maximisation, revenue maximisation and sales maximisation.
- Draw and label a diagram showing the output chosen under each of the three objectives.
- Apply the profit formula (profit = TR − TC) to a simple numerical example and link it to the relevant objective.
Business objectives exam tips
Marking Points
- Profit maximisation occurs where MC = MR, and the diagram shows the MC and MR curves intersecting at the profit-maximising output.
- Revenue maximisation occurs where MR = 0, shown where the MR curve cuts the horizontal axis and TR is at its peak.
- Sales maximisation occurs where AR = AC, shown where the average revenue and average cost curves intersect at the highest output consistent with normal profit.
- Profit is calculated as total revenue minus total cost (profit = TR − TC), and the objective determines which output condition is chosen.
- A correct diagram must label the axes (output and cost/revenue), the relevant curves and the equilibrium output for the chosen objective.
Examiner Tips
- 💡Learn the three equality conditions as a set: MC = MR for profit maximisation, MR = 0 for revenue maximisation and AR = AC for sales maximisation.
- 💡Practise drawing one diagram per objective with clearly labelled axes, curves and the chosen output level before attempting multiple-choice questions.
- 💡When a question gives a numerical example, calculate TR, TC and profit first, then identify which equality condition matches the figures.
Common Mistakes
- Confusing revenue maximisation with profit maximisation: revenue maximisation is where MR = 0, not where MC = MR, and the correction is to state the equality condition for each objective.
- Believing sales maximisation means selling as much as physically possible: it is the output where AR = AC, so the firm still earns normal profit rather than making a loss.
- Writing the profit formula incorrectly, for example as TR + TC: profit is total revenue minus total cost, so the corrected formula is profit = TR − TC.
- Omitting labels on a diagram: unlabelled axes or curves cannot show which objective is being illustrated, so every curve and axis must be named.