Sales versus Profit Maximisation

The simulation

This link gives you access to the simulation.

• Run the full simulation »»

• Understanding the simulation »»

Background information

This link gives you access the issues surrounding the simulation.

• The information pack »»

• Background on how to publish spreadsheets on the web »»

The effects of changing the inputs of the simulation

These links include interactive self-assessment questions looking at the effects of each change

• Consumer welfare under sales maximisation

Further questions

These are traditional question types where the answers can include information on the simulation.

• Essay questions »»

• Further study questions »»

Overview

The questions include you interpreting the model output within your answers. In this case, the
model output consists of the following;
 • The price

• The quantity

• The total revenue

• The total costs

• The profit
Your discussion should focus on using the simulations to support the theoretical expectations of your
discussion. For instance, you could argue that the consumer is better off when the price is low and
the quantity supplied is high (large consumer surplus). Given this assumption then the consumer
should be better off if the firm sales maximisation compared to profit maximisation. You can test this
expectation using the simulation.

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Sales versus Profit Maximisation

2.0
Price Elasticity of Demand

100
Fixed Costs (£)

25
Variable Costs per Unit (£)

50
Desired Profit Level (£)

Sales versus Profit Maximisation

Sales Maximisation Output Level

Quantity (Q) 43.03

Price (£) 28.49

Total Revenue (TR) 1225.69

Total Cost (£) 1175.69

Profit (£) 50.00

Profit Maximisation Output Level

Quantity (Q) 25.00

Price (£) 37.50

Total Revenue (TR) 937.50

Total Cost (£) 725.00

Profit (£) 212.50

Information Pack

Sales versus Profit Maximisation: Introduction

The objective of this simulation is to illustrate how the output and price decisions of a firm in an
imperfect market would differ under different objectives. This involves the comparison of profit
maximisation with sales maximisation.

Background
There are various maximising objectives of the firm in an imperfect market. There are repercussions
for all stakeholders (firms, shareholders, consumers and so on) depending on which objective the
firm adopts as this affects its pricing and output behaviour. There are also effects on the revenue,
costs and profit levels.

The Model

We use models in an attempt to explain or predict outcomes.

A model simplifies the relationship between various economic factors. This simplification of the
complex interactions between individuals, groups and institutions relies on the ceteris paribus
assumption. In other words, other things being equal or unchanged.

You can download an Excel version of the original spreadsheet (Excel 97).

The Model Settings

The simulation allows the individual to set the price elasticity of demand, the fixed costs, the
variable costs and the desired profit level. The model output includes the quantity, price, total
revenue, total costs and profit under sales and profit maximisation.

The model settings for the inputs are;

• Price elasticity of demand: 0.0 to 3.0

• Fixed costs (£): 50 to 200

• Variable Costs (£): 5 to 50

• Desired Profit Level (£): 50 to 290

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Sales versus profit maximisation

The aim of these questions is to identify under which maximisation theory the consumer is
better off

Principio del formulario

Is the sales maximisation output level likely to be higher or lower than that of
a profit maximising firm, assuming the firm operates in an imperfect market?
(select one answer)

(a) higher answer OK

(b) lower

A firm that sales maximizes produces where average costs equal average revenue (AC=AR),
while a firm that profit maximizes produces where marginal cost equals marginal revenue
(MC=MR). If it is assumed that the firm operates in an imperfect market then the sales
maximisation point will have a greater output level compared to the profit maximization point.

1 Yes - read the th Wrong ! - read the

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there is more info A firm that sales 0 0 1

true Correct<br /><br

Final del formulario

Given the following conditions, is the consumer better or worse off if the firm adopts sales

maximisation compared to profit maximisation?;

• Price Elasticity of Demand = 2.0

• Fixed Costs (£) = 100

• Variable Costs (£) = 25

• Desired Profit Level = 50

(Type your answer to the previous question in the box below, then click on explain)
Principio del formulario

The aim of the consumer will be to maximise their utility. This can be achieved through receiving
a high quantity of goods at a low price (large relative consumer surplus). Therefore, a method of
assessing which objective of the firm is best for the consumer can be assessed through looking at
the relative price and quantity levels.
It appears that the consumer will be better off when the firm is sales maximising compared to
profit maximisation. For instance, under sales maximisation the output level is 43 and the price is
28.49. This compares to an output of 25 and a price of 37.50 if the firm opt for profit maximisation.
Therefore, the consumer would receive more goods at a lower price when the firm sales
maximises.
%answ er% The aim of the co 0 0

0 false

Final del formulario

Help on
Your answer structure »»

Understanding the simulation »»

Hints on the impact on the consumer »»

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ANSWER STRUCTURE

General Points

You should be aware of the following points when you structure your answer

• Include an introduction that states what you attempted and why

• When quoting numbers always include the units.

• Look for indicators that have had significant changes

• Try to include a comparison within your answer

• Include a clear conclusion that answers the question

Additional help is available from the Learning Materials section. If you visit the following pages you
will need to use the back button on your browser to return to this page.

UDERSTANDING THE SIMULATION

The questions include you interpreting the model output within your answers. In this case, the model
output consists of the following;

• The price

• The quantity

• The total revenue

• The total costs

 • The profit
Your discussion should focus on using the simulations to support the theoretical expectations of your
discussion. For instance, you could argue that the consumer is better off when the price is low and the
quantity supplied is high (large consumer surplus). Given this assumption then the consumer should
be better off if the firm sales maximisation compared to profit maximisation. You can test this
expectation using the simulation.

HINTS ON THE IMPACT ON THE SOCUMER

Consumer welfare will be dependent on the size of the individuals utility. Unfortunately, utility is very
difficult to measure. A good proxy for an individual's utility is the size of their consumer surplus. If the
consumer surplus is high for a good, then they will have spare income to spend on other goods. This
would increase their utility. In other words, the lower the price, the higher the quantity, the better off
the consumer.

Sales versus Profit Maximisation: Further Study Questions

Task: Report and Online Discussion: The gainers and losers from different aims of the firm

You work in the Economic Planning Department of a consultants, Econ Consult. You have been asked
by the Managing Director to work in a small group with 3 other people to write a response to the
following enquiry.

Company Name : We need to know

Contact Name : Dr J Jack
Company Address : Room 101, 77 Old Road, Bath, NW29
The managers of the company are evaluating different options for output and price decisions. They
have decided to either maximise sales or profit.

Could you discuss the advantages for individual stakeholders within the firm (managers,
shareholders, workers, customers) of both policies.

The input conditions are;

• Price Elasticity of Demand = 1.0

• Fixed Costs (£) = 80

• Variable Costs (£) = 20

• Desired Profit Level (£) = 50

Your findings need to be presented in two ways, the first will be as a written report with covering
letter, second will be as a question and answer session on the content of the report.