You are viewing a free preview of this lesson.
Subscribe to unlock all 10 lessons in this course and every other course on LearningBro.
Understanding why firms behave the way they do requires an examination of their objectives. Traditional economic theory assumes that firms are profit maximisers, but modern theories recognise a far wider range of objectives — particularly in large firms where ownership is separated from control. The objective a firm pursues determines the price it sets, the output it produces, and the profit it earns — so this single decision ripples through every market-structure diagram in the rest of the course. This lesson builds the revenue toolkit (TR, AR, MR) that underpins all later analysis, then examines the competing objectives firms may pursue and the conflicts between owners and managers that explain why real firms so often deviate from the textbook profit-maximising ideal.
AQA A-Level Economics (7136) — this lesson sits within 4.1.4 Production, costs and revenue, specifically the objectives of firms and the relationship between total, average and marginal revenue. It also previews 4.1.5 Market structure, since revenue curves differ between price-takers and price-makers.
Assessment Objectives developed here:
| AO | Skill | In this lesson |
|---|---|---|
| AO1 | Knowledge | Define profit/revenue/sales maximisation, satisficing, the principal–agent problem; derive TR, AR, MR |
| AO2 | Application | Apply objectives to named firms (Amazon, the supermarkets) and to specific revenue calculations |
| AO3 | Analysis | Construct chains: divorce of ownership and control → managerial objectives → lower profit/higher output |
| AO4 | Evaluation | Judge whether firms profit-maximise, conditioned on firm type, market structure and time horizon |
The traditional assumption in microeconomics is that firms aim to maximise profit. Profit is the difference between total revenue (TR) and total cost (TC):
π=TR−TC
A firm maximises profit at the level of output where marginal cost (MC) equals marginal revenue (MR), provided MC is rising and cuts MR from below. The logic is marginal: at any output below this point, MR>MC, so producing an extra unit adds more to revenue than to cost and profit rises; beyond this point, MC>MR, so each additional unit costs more than it earns and profit falls. The peak of total profit therefore sits exactly where the gap between TR and TC is widest — which is precisely where their slopes (MR and MC) are equal.
| Concept | Definition | Formula |
|---|---|---|
| Total Revenue (TR) | Total income from selling output | TR=P×Q |
| Average Revenue (AR) | Revenue per unit sold — equal to the price | AR=TR÷Q=P |
| Marginal Revenue (MR) | Additional revenue from selling one more unit | MR=ΔTR÷ΔQ |
| Total Profit | Difference between total revenue and total cost | π=TR−TC |
| Normal Profit | The minimum return to keep a firm in the industry — an economic cost | Included in TC |
| Supernormal Profit | Any profit above normal profit | TR>TC (incl. normal profit) |
Exam Tip: Normal profit is treated as a cost in economics — it is the opportunity cost of the entrepreneur's time and capital, the return just sufficient to keep them from switching resources to the next-best use. When economists say a firm earns "zero economic profit," the firm is still earning enough to stay in business. Supernormal (or abnormal) profit means earning more than this minimum.
It is not enough that MC=MR; the second-order condition requires that MC is rising (cutting MR from below). Where MC cuts MR from above (the falling section), the firm is at a profit minimum. A neat way to remember it: from there, expanding output would raise MR above MC and improve things, so it cannot be the maximum. In practice the rule is doubly useful because it lets an examiner test the same idea two ways — either "identify the profit-maximising output" (find MC = MR) or "explain why the firm does not produce at a higher/lower output" (compare MC and MR either side).
The marginal rule (MC = MR) has an equivalent totals interpretation that many students find more intuitive. Profit is the vertical gap between the TR and TC curves. Where the gap is widest, the two curves have the same slope — and the slope of TR is MR while the slope of TC is MC, so the widest gap occurs exactly at MC = MR. The diagram below makes this concrete: total profit is the green distance, maximised at the output where a tangent to TC is parallel to TR.
Where TC lies above TR (at very low or very high output) the firm makes a loss; the two break-even points are where TR = TC. Between them lies the profitable range, and the single profit-maximising output sits where the gap peaks. This totals diagram is especially helpful for explaining revenue and sales maximisation later, because all three objectives can be located on the very same pair of curves: profit maximisation where the gap is widest, revenue maximisation at the top of the TR curve, and sales maximisation at the second break-even point where TR has fallen back to equal TC. Seeing the three objectives side by side on one diagram makes their ranking obvious — profit-max output lies furthest left, revenue-max next, and sales-max furthest right — and it reinforces why each successive objective implies a lower price along the downward-sloping AR curve.
The marginal MC = MR rule and the totals TR−TC rule are two windows on the same decision, and a fluent candidate switches between them depending on what the question supplies — a totals table invites the gap approach, whereas curve diagrams invite the marginal approach.
Everything that follows in the course depends on the shape of the revenue curves, and that shape depends entirely on the demand curve facing the firm.
For a firm with market power (a price-maker — monopoly, monopolistic competition, oligopoly), the demand curve slopes downward. To sell one more unit, the firm must lower the price on every unit it sells, not just the marginal one. So the marginal revenue from the extra unit is the new price minus the revenue lost on all the inframarginal units. This is why MR lies below AR whenever AR is falling.
For a linear (straight-line) demand curve, MR has the same vertical intercept but twice the gradient — it bisects the horizontal distance between the price axis and the demand curve. The diagram below shows the standard relationship.
For a firm with no market power (a price-taker in perfect competition), the demand curve facing the individual firm is horizontal at the market price. The firm can sell as much as it likes without moving the price, so the marginal unit earns exactly the price and there is no inframarginal loss to subtract — hence AR = MR = P, a single horizontal line. This special case is explored fully in the perfect-competition lesson, but the contrast is worth fixing now: a price-taker's MR curve is its demand curve, whereas a price-maker's MR curve falls away beneath demand. The whole difference between competitive and uncompetitive behaviour can be traced to that one geometric fact.
Suppose a price-making firm faces the hypothetical linear demand curve P=100−2Q (price in £, Q in thousands of units). Then TR=P×Q=(100−2Q)Q=100Q−2Q2, and the marginal revenue is the rate of change of TR:
MR=ΔQΔTR=100−4Q
| Q (000s) | P = AR (£) | TR (£000s) | MR (£) |
|---|---|---|---|
| 0 | 100 | 0 | — |
| 5 | 90 | 450 | 80 |
| 10 | 80 | 800 | 60 |
| 15 | 70 | 1,050 | 40 |
| 20 | 60 | 1,200 | 20 |
| 25 | 50 | 1,250 | 0 |
| 30 | 40 | 1,200 | −20 |
Notice the structure: MR (100−4Q) is twice as steep as AR (100−2Q) and reaches zero at Q=25, exactly where TR peaks at £1.25m. Beyond that, MR turns negative and total revenue falls — selling more actually destroys revenue. This is the geometric heart of the revenue-maximisation rule below.
Exam Tip: Link revenue to price elasticity of demand. Where MR > 0, demand is price-elastic (a price cut raises TR); where MR = 0, elasticity = 1 (unitary); where MR < 0, demand is inelastic (a price cut lowers TR). A firm would never knowingly produce on the inelastic portion — it could raise price, cut output, and increase TR while cutting costs.
The link between marginal revenue and elasticity is more than a curiosity; it is the bridge from this lesson to every pricing decision in the course. Along a single straight-line demand curve, elasticity falls continuously as we move down and to the right: demand is highly elastic near the top (a small price cut wins many extra customers, so TR rises and MR is strongly positive), unit-elastic at the midpoint (TR is flat, MR is zero), and inelastic near the bottom (a price cut sheds revenue, so MR is negative). The same demand curve therefore contains both an elastic and an inelastic region — which is exactly why a profit-maximising price-maker always operates on the elastic portion, since at MC = MR with MC positive, MR must be positive, and positive MR means elastic demand.
This insight explains observed firm behaviour. A firm with strong pricing power — few substitutes, loyal customers, a differentiated brand — faces a steep, inelastic demand curve and can sustain a price well above marginal cost. A firm in a crowded market faces a flat, elastic demand curve and has little room to raise price without losing custom to rivals. The degree of market power, which the rest of the course measures structure by structure, is ultimately a statement about the elasticity of the demand curve each firm faces. Building this intuition now pays off when we contrast the horizontal demand of perfect competition (perfectly elastic, no pricing power) with the steep demand of monopoly (inelastic at the relevant output, substantial pricing power).
William Baumol (1959) proposed that firms — particularly large corporations — may aim to maximise total revenue rather than profit. His argument rested on the separation of ownership and control: managers' salaries, bonuses, status and career prospects are often more closely tied to the size of the firm (measured by sales revenue) than to its profitability.
Revenue is maximised at the output where MR = 0. At this point the firm sits at the midpoint of a linear demand curve, where elasticity equals one and total revenue is at its highest, as the worked example confirmed (Q=25).
| Feature | Profit Maximisation | Revenue Maximisation |
|---|---|---|
| Output rule | MC = MR | MR = 0 |
| Output level | Lower | Higher |
| Price | Higher | Lower |
| Profit | Maximum | Lower than maximum |
Baumol recognised a constraint: shareholders require a minimum acceptable level of profit. If the firm fails to deliver this, shareholders sell their shares, the share price falls, and the firm becomes vulnerable to a takeover that would cost incumbent managers their jobs. Revenue-maximising managers must therefore satisfy a profit constraint — they maximise revenue subject to achieving at least the profit shareholders demand. If the constraint bites, the firm operates between the profit-maximising and the unconstrained revenue-maximising output.
Exam Tip: The revenue-maximising output is always greater than the profit-maximising output. At MC=MR, marginal revenue is still positive (assuming MC>0), so the firm could raise TR by producing more — but doing so would reduce profit because those extra units cost more to make than they add to revenue.
Baumol also considered a more extreme objective: sales maximisation, where the firm aims to sell the greatest possible volume of output subject to covering all its costs. The firm produces where AR = AC — earning only normal profit and no more, and pushing output as far right as is consistent with survival.
Sales maximisation yields a higher output and lower price than either profit maximisation or revenue maximisation. It is often rational for firms entering new markets, where building installed base and market share matters more than short-run profit — particularly where network effects or switching costs mean early dominance is self-reinforcing.
The distinction between revenue maximisation and sales maximisation is subtle but examinable. Revenue maximisation stops at the top of the total-revenue curve (MR = 0); the firm could sell more units but each extra unit would reduce total revenue. Sales maximisation pushes beyond this, all the way to the output where total revenue has fallen back to equal total cost (AR = AC), so the firm is selling the largest volume consistent with survival and earning only normal profit. A sales maximiser is therefore willing to forgo revenue in pursuit of sheer market presence — a strategy that only makes sense if present-day scale translates into a durable future advantage, whether through scale economies, brand entrenchment, data accumulation, or the lock-in created by network effects. Where no such future payoff exists, sales maximisation is simply value destruction, which is why examiners reward candidates who treat it as a conditional rather than a universally sensible objective.
graph LR
A["Objective chosen"] --> B["Profit max: MC = MR"]
A --> C["Revenue max: MR = 0"]
A --> D["Sales max: AR = AC"]
B --> E["Lowest output, highest price"]
C --> F["Higher output, lower price"]
D --> G["Highest output, lowest price (normal profit only)"]
Amazon famously prioritised sales growth and market share over profitability for many years. In his 1997 letter to shareholders, Jeff Bezos set out a philosophy of long-term market leadership over short-term profit. Amazon reinvested heavily in fulfilment infrastructure and made thin or negative profits for years — behaviour consistent with Baumol's sales-maximisation model, where the firm accepts minimal profit to maximise market presence and lock in scale economies (covered in the economies-of-scale lesson).
UK-facing platforms in food delivery and on-demand services frequently expanded city-by-city while loss-making, prioritising becoming the dominant platform over short-run profitability. The logic is sales maximisation subject to surviving long enough — they must satisfy investors' patience constraint, the private-market analogue of Baumol's profit constraint.
Herbert Simon (1947, 1955) challenged the assumption that firms optimise at all. Simon argued that decision-makers face bounded rationality — limited information, limited cognitive capacity and time constraints. Rather than maximising anything, managers satisfice: they aim for a satisfactory level of performance across multiple, sometimes conflicting, objectives.
A satisficing firm might target a "good enough" profit, a reasonable market share, adequate investment, and acceptable working conditions — none pursued to its theoretical maximum. The firm searches for an option that clears an aspiration level on each dimension and stops, rather than computing a single optimum.
| Aspect | Maximising Firm | Satisficing Firm |
|---|---|---|
| Information | Perfect | Imperfect / bounded |
| Decision rule | Optimise one variable | Clear aspiration levels across many |
| Behaviour | Calculated and precise | Pragmatic and adaptive |
| Realism | Low — a theoretical ideal | High — closer to observed behaviour |
Satisficing also reflects stakeholder pluralism: a firm answers to shareholders, employees, customers, suppliers, communities and regulators, whose interests diverge. Managers broker compromises rather than maximising any single group's payoff. This connects to the behavioural economics strand of the course — bounded rationality, rules of thumb and heuristics apply to firms as well as consumers.
A practical implication of satisficing is that firms may stick with a "good enough" decision long after a maximising firm would have changed course. Search is costly, so once an option clears every aspiration level the manager stops looking — even though a superior option may exist just out of view. This produces the observed inertia of real businesses: pricing rules, supplier relationships and product ranges that persist for years because they are satisfactory, not because they are optimal. It also means that what looks like irrational pricing to an outside economist may be a perfectly sensible response to genuine uncertainty. The model thus reframes the central question of the lesson: instead of asking "does the firm hit the profit maximum?", we ask "is the firm's behaviour reasonable given the information it actually has?" — a far more defensible standard, and one the best evaluation answers adopt.
Exam Tip: Simon's satisficing model is high-value evaluation material. If asked whether firms profit-maximise, you can argue that bounded rationality means many firms cannot even identify the profit-maximising output, let alone hit it — so the MC = MR model is a useful simplification, not a literal description.
Oliver Williamson (1964) argued that where ownership is separated from control, managers maximise their own utility rather than the firm's profit. Managerial utility rises with:
Williamson predicted that managerial firms would carry higher costs and lower profits than owner-managed firms, because managers divert resources towards their own interests — a theme that re-emerges as X-inefficiency in the monopoly lesson.
The conflict between shareholders (principals) and managers (agents) is the principal–agent problem. It arises from two features: asymmetric information (managers know more about the firm's true position than shareholders) and divergent objectives (owners want profit; managers want utility). Because shareholders cannot perfectly observe managerial effort, managers can pursue their own goals without immediate detection.
The problem is compounded by the collective-action problem among shareholders. In a widely held PLC, ownership is dispersed across thousands of small investors, none of whom has a large enough stake to justify the cost and effort of closely monitoring the board. Each shareholder rationally hopes someone else will do the monitoring — so in practice no one does, and managers enjoy considerable discretion. This is why institutional investors (pension funds, asset managers) matter so much: holding large blocks of shares, they have both the incentive and the power to challenge the board, partially solving the free-rider problem that defeats small shareholders. It also explains the importance of the market for corporate control: even passive shareholders are protected, indirectly, by the threat that an outside raider will buy up the under-priced shares of a poorly run firm, sack the incumbent managers, and run it better. The mere possibility disciplines managers who would otherwise drift away from profit maximisation. None of these mechanisms is perfect, however — dual-class share structures, poison pills and founder control can all blunt the takeover threat, leaving the principal–agent gap wide open in exactly the largest and most powerful firms.
The consequence for the firm's position on our diagrams is concrete. A management team indulging its own utility runs the firm with higher costs than necessary — too many staff, generous perks, comfortable but unprofitable projects. On a cost-and-revenue diagram this lifts the average cost curve and erodes the profit area, the seed of the X-inefficiency developed in the monopoly lesson. So the principal–agent problem is not merely an organisational curiosity: it changes the firm's costs, its output and its price, and therefore the welfare it delivers to consumers. That is why the apparently dry topic of "objectives" sits at the very front of the course — it is the behavioural foundation on which every later market-structure diagram is built.
| Mechanism | How It Aligns Interests |
|---|---|
| Performance-related pay | Bonuses tied to profit/share-price targets |
| Share options | Managers hold equity, so their wealth tracks shareholder wealth |
| Threat of takeover | Poor performance depresses the share price, inviting a hostile bid (the "market for corporate control") |
| Non-executive directors | Independent directors monitor and challenge the executive |
| Corporate governance codes | The UK Corporate Governance Code sets accountability and disclosure standards |
Exam Tip: These mechanisms are imperfect. Share options can encourage short-termism (managers boosting the share price before exercising options) and even fraud; takeover threats are weak where founders retain voting control. Noting the limits of each mechanism is a ready-made evaluation paragraph.
| Objective | Explanation | Example |
|---|---|---|
| Survival | In a downturn the priority is simply to stay solvent and protect cash flow | High-street retailers during the COVID-19 pandemic |
| Growth maximisation | Grow output, revenue or assets as fast as possible (Robin Marris, 1964) | Scaling tech start-ups |
| Corporate social responsibility (CSR) | Balance profit with social and environmental goals | Firms publishing sustainability/net-zero commitments |
| Ethical objectives | Prioritise ethical conduct, sometimes above profit | The Co-operative Group's ethical sourcing policy |
Marris's growth-maximisation model is a useful bridge: managers want growth (for status and salary) but must keep enough profit to fund expansion and deter takeover — so it blends the Baumol and Williamson insights into a single constrained-growth objective.
Whether the profit-maximising assumption is realistic is itself an examinable evaluation, and the strongest answers refuse to give a blanket yes or no. The honest position is it depends — chiefly on firm type, market structure and time horizon.
Arguments that firms do profit-maximise. In highly competitive markets firms have little choice: any firm that fails to minimise costs and price competitively will be undercut and driven out, so competition selects for profit-maximising behaviour even if no manager consciously computes MC = MR. This is the "as-if" defence associated with Milton Friedman — survivors behave as if they maximise profit because the others have gone. In small, owner-managed firms the owner is also the residual claimant: every pound of profit is the owner's own income, so the incentive to maximise it is direct and undiluted. Even where managers run the firm, well-designed share options and a credible takeover threat can push behaviour close to the profit-maximising outcome.
Arguments that firms do not. In large public companies the divorce of ownership and control lets managers pursue revenue (Baumol), growth (Marris) or personal utility (Williamson) within a profit constraint rather than at the profit maximum. Bounded rationality (Simon) means firms often cannot even identify the profit-maximising output: cost and demand data are incomplete and constantly shifting, so managers satisfice with rules of thumb such as cost-plus pricing. Firms also pursue several objectives at once — protecting market share, sustaining R&D, meeting CSR or net-zero commitments — and these may conflict with short-run profit. Finally, short-run profit maximisation can be irrational over the long run: aggressively raising price to maximise this year's profit may invite entry, damage brand reputation, or provoke regulatory scrutiny, lowering the present value of future profits.
Reaching a judgement. A defensible conclusion distinguishes between contexts: profit maximisation is a reasonable working assumption for small owner-run firms and for firms under fierce competitive or takeover discipline, but a poor description of large, widely held firms with weak governance, especially over short horizons. Crucially, even the alternative objectives are usually profit-constrained — firms cannot ignore profit indefinitely without losing access to capital — so the realistic model is "constrained pursuit of managerial goals" rather than either pure profit maximisation or its complete abandonment.
Exam Tip: When evaluating, always condition on the type of firm (small vs large, owner-managed vs PLC), the market structure (competitive vs concentrated) and the time horizon (short vs long run). Examiners reward applied discrimination far more than a generic list of "for and against" points.
Extract: "Several large UK-listed companies have faced shareholder revolts over executive pay. Critics argue boards reward managers for revenue growth and acquisitions rather than profitability, while defenders say pay must be competitive to retain talent. One activist investor claimed a target firm was 'run for its managers, not its owners.'"
(a) A firm faces demand P=80−4Q (£, Q in thousands). Calculate the output and price at which total revenue is maximised. (4 marks)
(b) Analyse how the divorce of ownership from control may lead a firm to produce a higher output and charge a lower price than a profit maximiser. (9 marks)
(c) Evaluate the view that policies to align managerial and shareholder interests will always improve a firm's economic performance. (25 marks)
TR=(80−4Q)Q=80Q−4Q2, so MR=80−8Q. Setting MR=0 gives Q=10 (thousand units). Price: P=80−4(10)=£40. Maximum TR =40×10,000=£400,000.
Mid-band response
The divorce of ownership and control means the owners (shareholders) are different people from the managers who run the firm. Managers might not want to maximise profit. Instead they could try to maximise revenue or sales because their pay is linked to how big the firm is. This means they produce more output and charge a lower price than a profit maximiser would, because they keep producing past the point where MC = MR.
This identifies the mechanism and the directional result but the chain is thin: there is no revenue-curve reasoning, no diagram, and the MR = 0 / AR = AC rules are not used.
Stronger response
When ownership is separated from control, managers (agents) may pursue objectives other than profit because their utility depends on salary, status and the size of their department (Williamson, 1964). A revenue maximiser produces where MR = 0 rather than where MC = MR. Because MC is positive, MR = 0 lies to the right of MC = MR, so output is higher. Reading off the downward-sloping AR curve, a higher output corresponds to a lower price. A sales maximiser goes further still, producing where AR = AC (normal profit only), giving the highest output and lowest price of the three. This explains why a manager-run firm can systematically out-produce and under-price a profit maximiser.
Accurate, uses the decision rules and the AR curve, and ranks the three objectives — but does not yet anchor the argument in a diagram or the profit constraint.
Top-band response
The divorce of ownership and control (Berle and Means' classic observation) creates a principal–agent problem: managers hold superior information and pursue their own utility (Williamson, 1964), or maximise revenue subject to a profit constraint (Baumol, 1959). On a standard revenue diagram, the profit maximiser produces where MC = MR; the revenue maximiser produces the larger output where MR = 0; the sales maximiser produces the still-larger output where AR = AC. Because the AR curve slopes downward, each successive objective implies a lower price. The chain is therefore: misaligned incentives → managers choose a revenue or sales objective → output expands rightward → price falls along AR.
However, the size of the effect depends on the strength of the profit constraint. If shareholders demand a high minimum profit, or the threat of takeover is credible, managers cannot stray far from MC = MR and the price/output gap is small. The result also depends on whether managers genuinely face bounded rationality (Simon) — if they cannot identify MC = MR at all, the "deviation" is unintentional. So while the divorce of control can lower price and raise output, the magnitude is conditional on governance and market discipline.
Reaches a clear, conditional analytical result, sequences the three objectives on a common diagram, and already flags the constraints that the evaluation question would develop.
The discriminator between bands is the revenue-curve reasoning, not the list of objectives. Weaker answers assert that managers "want a bigger firm"; stronger answers derive the higher output from MR = 0 and AR = AC and read the price off the AR curve. The very best responses make the result conditional ("depends on the profit constraint / on bounded rationality"), which converts AO3 analysis into AO4 evaluation. In part (c), a top-band conclusion would not simply assert that alignment "works" — it would argue that share options can breed short-termism, that takeover threats are weak where founders keep control, and that the net effect on economic performance depends on whether the firm is small or large, owner-managed or widely held, and on the time horizon.
| Misconception | Correction |
|---|---|
| "Normal profit means zero profit." | Normal profit is a positive return — the opportunity cost of enterprise. "Zero economic profit" still leaves the owner content to stay. |
| "Revenue maximisation means producing as much as possible." | No — that is sales maximisation (AR = AC). Revenue is maximised at MR = 0, which is short of the maximum feasible output. |
| "MR = MC is the same as breaking even." | MR = MC locates the profit-maximising output; it says nothing about the level of profit, which depends on where AC sits. |
| "A firm always profit-maximises." | Only a default assumption. Divorce of control, satisficing and survival motives mean real firms frequently do not. |
| "Producing where MR is negative could be sensible." | Never knowingly — the firm could cut output, raise price and increase TR while lowering costs. |
The UK Corporate Governance Code, overseen by the Financial Reporting Council, exists precisely because the principal–agent problem is real: it requires listed firms to separate the roles of chair and chief executive, appoint independent non-executive directors, and put executive pay to an advisory shareholder vote. The recurring "shareholder spring" episodes — in which investors vote down generous pay packages — are the takeover-threat and monitoring mechanisms of Baumol and Williamson playing out in practice.
The contrast between John Lewis Partnership (employee-owned, explicitly balancing partner welfare with commercial success) and a conventional listed PLC illustrates how ownership structure shapes objectives: a partnership internalises stakeholder interests that a PLC must address through governance rules. Meanwhile the long loss-making growth phases of major platform businesses show Baumol's sales-maximisation logic operating at global scale — investors tolerate years of thin profit in exchange for market dominance and the scale economies it brings. Use these as illustrative, well-established examples rather than precise statistics.
The rise of stakeholder capitalism has sharpened the debate over objectives. Many large firms now publish environmental, social and governance (ESG) targets and frame their purpose around more than shareholder returns. A profit-maximisation purist would interpret this as either disguised long-run profit maximisation (a strong reputation lowers the cost of capital and protects revenue) or as evidence that the divorce of control lets managers indulge their own preferences with shareholders' money. A behavioural economist would read it as satisficing across multiple stakeholder aspiration levels. The same observable behaviour, in other words, can be rationalised by competing theories — which is precisely why "do firms profit-maximise?" remains a live evaluation question rather than a settled fact.
A further real-world lens is cost-plus (mark-up) pricing, the rule of thumb by which many firms actually set prices: they estimate average cost at a normal level of output and add a percentage margin. This is not the marginalist MC = MR calculation at all — it is a heuristic, exactly as Simon's bounded-rationality model predicts. Yet over time, competition and trial-and-error adjustment of the mark-up may nudge the cost-plus price towards the profit-maximising price, reconciling the behavioural account with the orthodox one. Recognising that the textbook MC = MR rule and the boardroom's mark-up rule can deliver similar outcomes is a hallmark of a sophisticated answer.
| Objective | Decision Rule | Key Economist | Output vs Profit Max |
|---|---|---|---|
| Profit maximisation | MC = MR (MC rising) | Traditional theory | — |
| Revenue maximisation | MR = 0 | Baumol (1959) | Higher |
| Sales maximisation | AR = AC (normal profit) | Baumol (1959) | Highest |
| Satisficing | Aspiration levels across many goals | Simon (1947, 1955) | Varies |
| Managerial utility | Maximise salary, staff, perks | Williamson (1964) | Higher |
| Growth maximisation | Maximise growth, profit-constrained | Marris (1964) | Higher |
Understanding objectives — and the revenue curves that operationalise them — is the foundation for analysing how firms behave in every market structure examined in the rest of this course.
This content is aligned with the AQA A-Level Economics (7136) specification.