Profit or Revenue Maximization?

Microeconomic thinking about firms starts from the premise that the goal of a firm is to maximize its profit. This assumption fits quite well with reality where we see firms striving to maximize their profits for a variety of reasons, not the least of which is to provide the highest possible return to the firm’s owners or shareholders.

On the other hand, a firm which strives to maximize its revenue is not necessarily maximizing its profit, since total revenue is only one half of the profit equation, where Profit = Total Revenue – Total Costs.

There are, however, a few scenarios in which maximizing revenue in the short run is a reasonable objective for a firm to pursue. One scenario is where the firm is opening up a new market and acquiring customers to build market share and presence before competitive entry is desirable. Another scenario is where the firm’s demand and cost curves are such that marginal profits are greater than zero up to a certain maximum. This maximum be imposed by a constraint such as plant capacity, etc. In such a case, the maximum level of output will also be the level at which the firm maximizes both revenue and profit, and so the firm should produce output at that level.

Profit maximization requires firms to determine the best output and price levels which maximize the firm’s return. It is not just about increasing the amount you sell.

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