Profit Maximization vs Sales Revenue Maximization Equilibrium

Firms aim to achieve specific objectives. The question compares two key objectives: maximizing profits and maximizing sales revenue.

Equilibrium Conditions Compared

The difference in objectives leads to different optimal choices regarding output level and price:

• Profit Maximization: This occurs where the firm produces the output level that maximizes the difference between total revenue and total cost. Mathematically, this is where Marginal Revenue ($MR$) equals Marginal Cost ($MC$), provided $MC$ is rising. $MR = MC$.
• Sales Revenue Maximization: This occurs where the firm produces the output level that generates the highest possible total revenue. This happens when Marginal Revenue ($MR$) is zero ($MR = 0$). This point typically occurs at a higher output level than profit maximization.

Outcome: Output and Price

Comparing the two objectives:

• A firm maximizing profit ($MR = MC$) produces less output and charges a higher price than a firm focused solely on maximizing sales revenue ($MR = 0$).
• A firm maximizing sales revenue produces more output and charges a lower price to achieve maximum total revenue.

Therefore, the equilibrium for a profit maximiser, compared to a sales revenue maximiser, takes place at lower output and higher price.