Sales Maximisation

I've been trying to do profit maximisations and i understand that part but sales revenue maximisation is proving quite a challenge. Iv got a question here which says when sales revenue is at its maximum point, does this also mean that profits are at a maximum point?

I was thinking of a two way debate....

NO because...

You have to remove costs of the goods sold to equal profit, e.g. Profit = Revenue - Costs whilst Revenue = Price x Quantity.
Inflation?

YES because...

Economies of scale perhaps?

Conclusion...

depends on the firms objectives, whether it wants to maximise profit or maximise revenue.

as you can see, im very stuck. help much appreciated.

Reply 1

trevthetrev

Yep, you are correct. Profit maximasiation is NOT the same thing as revenue maximasation. Profit maximasation occurs when MC=MR, and revenue optimasation occurs when the elasticity of the demand curve is one.

This means that it might just so happen that the two are the same point, but it is in no way a rule. Don't include inflation in this case.

There is not really a debate, the answer is more like "they are not correlated".

Hope it helps

Reply 2

Multiplexed

Argh... i put it as more of a debate, i'l let you read it (btw, the essay is on oil companies):

7. Nominal sales revenue is the amount of money a firm has earned for providing goods and services, for example revenue is defined as price of the goods sold x quantity of goods sold. When the sales revenue is at its maximum point this means that Marginal Revenue equals Zero. The objective of stated oil firms who want to maximize revenue is to maximise profits by decreasing their costs. This can be achieved by the theory of Economies of Scale (EoS). The idea of this is that when quantity produced is increased , the fixed costs are said to be spread over more units thus lowering unit costs and increasing the profit margin. This is particularly prevalent in the oil industry because the larger the oil tanker, the greater the economies of scale. For example, a tanker able to carry 10 cubic metres (m3) of oil and cost of each journey was £200, the average cost would be £20m3. However, if the tanker was able to transport 20m3, and the cost of the journey was £300 (considering increased maintenance, insurance, road tax etc), the average cost would be £15m3.

Apart from EoS, revenue maximisation allows a firm to increase their market share and subsequently their power over suppliers for example they are able to negotiate bigger discounts and thus lower their costs allowing for increased profits. As many of the oil firms carry immense amount of market power, they can negotiate discounts with ease.

However, on the other hand, it can be argued that sales revenue and profit are two different concepts. Profit is defined as total revenue – total costs. The argument here is that maximum revenue can not possibly be maximum profit because there are costs that haven’t been taken into consideration.

This bolded part is the part i am confused with, i know profit maximisation and revenue maximisation arent the same thing but i want to know WHY they arent the same thing? :frown:

Reply 3

barry_4_england

Well, a firm could sell more units thus increasing revenue, but they may have to pay works high overtime rates, or bring in more workers. This may mean that the marginal cost at this output is greater than the marginal revenue, and although the firm are getting some revenue for extra sales, they are losing out on profit because the MC is higher at this point. I haven't read that essay up there lol but I'm sure someone's said that sales maximisation is MR=0 (as it is downward sloping...firms in a non perfectly competitive market have to decrease the price of every unit to sell an addition one) and this will happen after MC=MR which is profit maximisation. MR=0 doesn't take into account costs, as the aim is to sell as much of its product as it can, possibly to gain a greater market share/product recognition or something, so even though they will be making a loss after the point MC=MR, their objectives may be different. Hope this helps.

Reply 4

WokSz

A firm would pursue a policy of sales maximisation as it has been instructed to keep its prices down, to cover their ATC, or to make sufficient profit to be self-financing when it comes to investment. By keeping prices down, the firm ensures that the quantity demanded is sufficiently high to gain enough revenue to pay its ATC. Is this correct?

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