Question

Struggling with the following question

"Profit maximisation does not necessarily imply revenue maximisation. Discuss

with the aid of a well labelled diagram?"

they are asking for around 400 words

Answer 1

Hi,

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Questio:

Answer:

Profit:

Profit is the net difference between revenue and costs. The main way that firms use profit is to: Pay dividends to shareholders. Invest in increasing capacity or expanding into new markets. A government levy a corporation tax on the percentage of firm profits. In Indira, profit is calculated after the tax deduction.

Revenue-

Revenues definition is defined as fees earned from providing services and the amounts of merchandise sold. Examples of revenue accounts include: Sales, Service Revenues, Fees Earned, Interest Revenue, Interest Income. Revenue accounts are credited when services are performed/billed and therefore will usually have credit balances.Revenue is the amount of money that a company actually receives during a specific period. It is the top line or gross income figure from which costs are subtracted to determine net income. Revenue is known as the top line because it is displayed first on a company's income statement.

Profit Maximization:

Profit is the amount of value that remains after you subtract the expenses your business incurs during the year from the amount of revenue it produces. In addition to additional cash, profit could be defined as a decrease in liabilities, an increase in assets, or an increase in the owners’ value in the company.

Profit maximization describes when a business can sell a product so that the marginal revenue equals the marginal cost when the value of marginal cost is increasing (applicable for perfect competitive market).

Revenue Maximization:

Revenue is essentially another word for sales, or how much of the good or service that your business produces is sold to consumers. Revenue does not take into consideration the costs necessary to produce or market your business’s product, so it does not reflect what the owners ultimately receive.

A revenue maximization strategy dictates that a business should do whatever is required to sell as much of its product at as high a price as possible.

Now we come on the question: "Profit maximization does not necessarily imply revenue maximization".

We have saw that revenue of a company is essentially another word for sales, or how much of the good or service that your business produces is sold to consumers. Revenue does not take into consideration the costs necessary to produce or market your business’s product, so it does not reflect what the owners ultimately receive but profit is the net difference between revenue and costs. So, when we talk about the revenue we only talk about the number of unit a Company has sold at specific price. Its only show the picture of total sales of core product or services. Revenue only talk about the sales of core products or services not income from other source like, interest income, income from the fluctuation of exchange rate etc. But when we talk about the profit then we talk about the final earning after deduction of all cost ( operating cost, interest cost, tax etc). Profit is the final earning or can say that profit is the real earning of owners.

Some time a company can increase own revenue through increasing the price of Products or service and some time a company do it through growing its sales. Increasing the price is not a good idea for a firm or company that is doing business in perfect competitive market Because company can lose its customers and in long term it will badly affect the profit of the company.

But in case of profit maximization then we talk about the final income ( revenue-cost). Revenue is always different than profit and always more than profit because we subs tract the cost from revenue to calculate the profit. so a company can earn more profit by two ways, first, minimizing total cost and second, maximizing sales at maximum possible price. If a company don not control the cost and generate more revenue but growth of revenue is less the growth of cost then company will suffer and will earn less or no profit and vice-versa. If a company does not increased its revenue but reduced its cost at maximum level then the profit of the company will increased.

Now understand it by a graph :

Profit Maximization-

The firm is, thus, in equilibrium when MC = MR = AR (Price). The equilibrium of the profit maximization firm under perfect competition is shown in graph. Where the MC curve cuts the MR curve first at point A.

It satisfies the condition of MC = MR, but it is not a point of maximum profits because after point A, the MC curve is below the MR curve. It does not pay the firm to produce the minimum output when it can earn larger profits by producing beyond OM.It will, however, stop further production when it reaches the OM1 level of output where the firm satisfies both conditions of equilibrium. If it has any plans to produce more than OM1 it will be incurring losses, for the marginal cost exceeds the marginal revenue after the equilibrium point B. Thus the firm maximizes its profits at M1B price and at the output level OM1.

Revenue Maximization-

Revenue maximization is a theoretical objective of a firm which attempts to sell at a price which achieves the greatest sales revenue. This would occur at the point where the extra revenue from selling the last marginal unit (i.e. the marginal revenue, MR, equals zero). If marginal revenue is positive, an extra unit sold must add to total revenue and revenue maximization will not have been reached. Only when marginal revenue is zero will total revenue have been maximized.

Stopping short of this quantity means that an opportunity for more revenue has been lost, whereas increasing sales beyond this quantity means that MR becomes negative and TR falls. This can be seen in the following graph, with revenue maximization at output Q, and at point A on the AR curve.

SO, you can see in the graphs that the effect and condition of profit maximikzation and revenue maxamization is different. So, Profit maximisation does not necessarily imply revenue maximisation.

Note: Here we have taken an example of perfect competitive market because it is most popular and founded every where.

Thank You