DIFFERENCE BETWEEN REVENUE MAXIMIZATION AND PROFIT MAXIMIZATION

Revenue maximization and profit maximization are two terms that are often used interchangeably.

However, they are not the same. In this post, we will look at the differences between revenue maximization and profit maximization.

Revenue maximization

Revenue is another way of saying sales. Therefore, revenue maximization means earning the highest revenue possible from the sales of goods and services.

Revenue is maximized when marginal revenue is equal to zero.

Marginal revenue is the additional revenue obtained from selling an additional unit of a good. Marginal revenue is calculated as changes in total revenue divided by changes in quantity demanded.

Profit maximization 

Profit is the difference between total revenue and total cost. Profit maximization means earning the highest profit possible.

Profit is maximized when marginal profit is equal to zero. 

Marginal profit is defined as the additional profit earned from producing additional units of a good. It is the first derivative of the total profit.

Just like profit is the difference between total revenue and total cost, marginal profit is the difference between marginal revenue and marginal cost.

Given that marginal profit is the difference between marginal revenue and marginal, it can be said that a firm maximizes profit where marginal revenue equals marginal cost so that marginal profit is equal to zero.

Proof that mp=0 is the same as MR=MC

$$MP=0$

Recalled that $MP=MR-MC$

$$MR-MC=0$$

$$MR=MC$$

Thus, it can be said that a firm maximizes profit where marginal revenue is equal to marginal cost or where marginal profit is zero.

What is the difference between revenue maximization and profit maximization?

The major difference between revenue maximization and profit maximization is this: a firm maximizes revenue when it is producing where marginal revenue is zero whereas a firm maximizes profit where marginal revenue is equal to marginal cost.

This means that the revenue-maximizing quantity may not necessarily be the profit-maximizing quantity and the profit-maximizing quantity may not necessarily be the revenue maximizing quantity.

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