7.8 Differing Objectives and Policies of Firms

2026 Syllabus Objectives

By the end of these notes, you should be able to:

  1. Explain the traditional profit-maximising objective of firms
  2. Understand other objectives of firms: survival, profit satisficing, sales maximisation, and revenue maximisation
  3. Explain price discrimination (first, second, and third degree), including the conditions for it to work and its consequences
  4. Explain other pricing policies: limit pricing, predatory pricing, and price leadership
  5. Understand the relationship between price elasticity of demand and a firm's revenue — in a normal downward-sloping demand curve and in a kinked demand curve

Section 1: The Traditional Profit-Maximising Objective

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What is profit?

Profit is the money a firm earns after paying all its costs. In simple terms:

Profit = Total Revenue − Total Cost

  • Total Revenue (TR) is all the money a firm earns from selling its goods or services. TR = Price × Quantity Sold.
  • Total Cost (TC) is everything the firm spends to produce those goods — wages, raw materials, rent, electricity, and so on.

Why do firms want to maximise profit?

Traditional economic theory assumes that firms are owned by shareholders (people who have invested money into the business). These shareholders want the highest possible return on their investment. So, the firm's main goal is to make as much profit as possible — this is called profit maximisation.

How does a firm maximise profit?

A firm maximises profit at the output level where:

Marginal Revenue (MR) = Marginal Cost (MC)

  • Marginal Revenue (MR) is the extra revenue a firm earns from selling one more unit.
  • Marginal Cost (MC) is the extra cost of producing one more unit.

Why this rule works — step by step:

  • If MR > MC: Producing one more unit earns more than it costs → the firm should produce more.
  • If MR < MC: Producing one more unit costs more than it earns → the firm is losing money on that unit and should produce less.
  • If MR = MC: The firm cannot increase profit by changing output → this is the profit-maximising point.

Think of it this way: Imagine you're selling lemonade. Each extra cup earns you 50 cents but costs 30 cents to make. You keep making more cups because you're gaining 20 cents each time. But at some point, your costs rise (you need more lemons, more cups, more effort). Once each extra cup costs exactly 50 cents to make — the same as you earn — you stop. That's your profit-maximising output.

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