Profit, revenue and sales maximisation marked on one diagram, and why a firm might not maximise profit at all.
Disney+ launched in the US in November 2019 at $6.99 a month. Subscribers poured in, but by early 2023 Disney’s streaming business had lost close to $10 billion. Disney’s chief executive, Bob Iger, said that in the push to grow subscribers worldwide the company had got its pricing wrong. In December 2022 the ad-free price rose by 38%, and most subscribers stayed. The streaming business made its first profit in 2024.
So for its first three years, Disney+ was not trying to make the most profit it could. What was it trying to do, and why?
Sources: Reuters (September 2025); Fox Business (March 2023).
A firm’s managers are paid a bonus based on how much the firm sells, in pounds.
Compared with a firm run purely for its shareholders’ profit, what are the managers likely to do?
A bonus tied to sales revenue rewards selling more, not making more profit. The managers will push output beyond the profit-maximising level, which means cutting the price. This is the principal–agent problem.
One firm with some market power, so a downward-sloping AR. MR falls twice as steeply. MC cuts ATC at its lowest point. One diagram shows three different objectives.
Profit maximisation: produce where MC = MR, at Qπ, and charge Pπ, read up from Qπ to demand. Every unit up to here adds more to revenue than to cost. This is the objective economists usually assume: profit pays the owners for the risk they took and funds investment in new capital and research.
Check: Why does the profit-maximising firm stop at Qπ and not produce one more unit?
Beyond Qπ, MC is above MR: the next unit costs more than it brings in, so profit would fall.
Revenue maximisation: produce where MR = 0, at Qr. Up to here each extra unit adds to total revenue. Beyond it, cutting the price loses more revenue than the extra sales bring in. Costs play no part. Output is higher and the price lower than at profit maximisation.
Teacher tip: Revenue maximisation is read off MR alone, where MR meets the output axis. There is no crossing with MC to find, and the price still comes from AR above that output.
Check: Which condition gives the revenue-maximising output?
Total revenue rises while MR is positive and falls once MR is negative, so it peaks where MR = 0.
A third objective is to sell as many units as possible without making a loss.
Check: Where will a sales-maximising firm produce?
Up to that output price still covers average cost. One unit more and price falls below ATC, so the firm would make a loss.
Sales maximisation: sell as many units as possible without making a loss. Keep going until AR = ATC, at Qs. Price only just covers average cost, so the firm makes normal profit. This is the highest output and the lowest price of the three. With no abnormal profit on show, new firms have less reason to enter: a price set this low to deter entry is called limit pricing. A firm building market share against strong rivals, as Disney+ did against Netflix, behaves more like this than like a profit maximiser.
In a large company the shareholders own the firm, but salaried managers run it.
Check: Why might the managers of a large company choose an output other than Qπ?
Owners and managers are different people with different aims: the principal–agent problem. Managers may chase revenue, sales or market share if that is what raises their pay and status.
Why would a firm not maximise profit? In large companies there is a divorce between ownership and control. The owners (shareholders, the principals) do not run the firm; the managers (the agents) do. Managers may chase revenue, sales or market share for their own pay and status: the principal–agent problem. Others satisfice: they aim for enough profit to keep shareholders content rather than the most possible, often to keep workers, customers and regulators on side. Very high profits can bring a competition investigation. Their output is not at Qπ, but it need not be higher.
Check: A firm’s board accepts less profit than it could make, so that its workers, customers and regulator stay content. This is:
Satisficing means aiming for a satisfactory level of profit, enough for the owners, while keeping other stakeholders on side.
They marked where AR = ATC. That is sales maximisation: the most the firm can sell without making a loss. Revenue maximisation is where MR = 0, at a lower output.
Explain why a large firm might produce more than the profit-maximising output.
In a large company there is a divorce between ownership and control. Shareholders (the principals) own the firm and want the most profit, but managers (the agents) run it and may have aims of their own. This is the principal–agent problem.
If managers are rewarded for the size of the firm or its sales, they may maximise revenue, producing where MR = 0 rather than where MC = MR. That means a higher output and a lower price than profit maximisation. Some go further and maximise sales, producing up to AR = ATC so the firm makes only normal profit, often to build market share or keep rivals out.
Others satisfice: they aim for enough profit to keep shareholders content. That means giving up some profit, but not necessarily producing more.
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