Cambridge International AS and A Level Economics: Firms' objectives and pricing (9708) – Revision Notes

Condensed notes for syllabus section 7.8 (Differing objectives and policies of firms), outcomes 7.8.1 to 7.8.5, in the Cambridge International AS and A Level Economics 9708 syllabus for examination in 2026, 2027 and 2028. Topic 7 is A Level content only and is not examined at AS.

For full explanations and longer worked examples, read the study guide. Then try the practice set, tick off the checklist, see the course hub and take a free 10-minute diagnostic.

All figures in this page are invented for illustration.

7.8.1 and 7.8.2 Objectives at a glance

Objective	Rule or aim	Output compared with profit maximum	Typical reason
Profit maximisation	MR = MC (MC cutting MR from below)	Benchmark	Owners run the firm
Survival	Cover AVC now, all costs later	Often higher output, lower price	New firm, price war, recession
Profit satisficing	A target profit, not the maximum	Usually lower	Managers differ from owners
Sales maximisation	Highest output with AR = AC (no loss)	Higher, with lower price	Market share, economies of scale
Revenue maximisation	MR = 0, so PED = 1	Higher, with lower price	Managers’ pay or status tied to turnover

Key points to remember.

• At the profit maximum MR = MC, not MR = 0 and not AR = AC.
• Revenue maximisation always sits at a higher output than profit maximisation when MC is positive, because MR is zero there but MC is above zero.
• Sales maximisation is limited by the break-even condition, so profit is normal (zero economic profit), not negative.
• Satisficing and the principal-agent problem go together: owners and managers want different things.

Worked reminder: three objectives

A firm faces P = 100 - 4Q and has TC = 200 + 24Q (illustrative, mu per week).

1. MR = 100 - 8Q. MC = 24. Profit maximum: 100 - 8Q = 24, Q = 9.5, P = 62, TR = 589, TC = 428, profit 161.
2. Revenue maximum: MR = 0, Q = 12.5, P = 50, TR = 625, TC = 500, profit 125.
3. Profit given up for the extra revenue = 161 - 125 = 36.

7.8.3 Price discrimination

Degree	Basis for the price	Example form	Consumer surplus
First	Each customer’s own maximum willingness to pay	Individual negotiation	Taken completely
Second	Quantity bought or option chosen	Block tariffs, bulk discounts	Partly taken
Third	Group with different PED	Peak and off-peak, student and adult	Reduced for the high-price group

Conditions (all three needed): price-setting power; ability to separate customers or markets and stop resale; different PEDs.

Method for third degree

1. Write each market’s demand and its MR.
2. Set MR = MC separately in each market to find Q and P.
3. Check the higher price is in the less elastic market (PED = slope inverse × P/Q).
4. Add profits. Compare with the single-price case.

Consequences, in two columns

For the firm and some consumers	Against
More profit, which may fund investment	Group charged more loses surplus
Output can rise when low-price groups are served	Costs of separating markets and policing resale
Cross-subsidy can keep a service running	Seen as unfair; may draw regulatory attention
Often lower price for price-sensitive groups	With linear demand output may not change, so welfare can fall

Worked reminder: block pricing

First 20 units at 5 mu and every unit above 20 at 3 mu. A customer buying 35 pays 20 × 5 + 15 × 3 = 100 + 45 = 145 mu. Average price = 145/35 = 4.14 mu. This is second degree, because the price depends on quantity.

Worked reminder: third degree

Market 1 has P = 50 - Q and market 2 has P = 30 - Q. MC is 10 mu.

1. Market 1: MR = 50 - 2Q = 10, so Q = 20, P = 30. Market 2: MR = 30 - 2Q = 10, so Q = 10, P = 20.
2. PED = P/Q here (slope 1): market 1 = 30/20 = 1.5 and market 2 = 20/10 = 2.0. The less elastic market 1 pays more.
3. Profit = 20 × 20 + 10 × 10 = 400 + 100 = 500 mu.
4. A single price: total demand Q = 80 - 2P, so P = 40 - Q/2 and MR = 40 - Q = 10, giving Q = 30 and P = 25. Profit = 30 × 15 = 450 mu. Discrimination adds 50 mu.

Describing the diagram in words

Draw two side-by-side panels with price on the vertical axis and quantity on the horizontal axis. Each panel has a demand curve, an MR curve and the same horizontal MC line. Mark the output where MR cuts MC in each panel, then read up to the demand curve for the price. The steeper (less elastic) panel has the higher price. Label the combined profit areas as the rectangles between price and MC up to each output.

7.8.4 Other pricing policies

Policy	What the firm does	Needs	Risk
Limit pricing	Sets price just below a potential entrant’s lowest average cost	Cost advantage, credible threat	Gives up profit now; entry may still happen
Predatory pricing	Prices below cost to force a rival out, then raises price	Deep pockets, barriers to re-entry	Losses; legal challenge
Price leadership	One firm moves price, others follow	Few firms, similar products	Tacit collusion concern; followers may defect

Method for deciding if limit pricing is worth it: compare profit at the limit price with the profit the firm expects if entry happens. If the first is larger, deterrence pays.

Worked reminder: limit pricing

Demand is P = 60 - Q and the incumbent’s MC = AC = 10 mu. Monopoly: MR = 60 - 2Q = 10, so Q = 25, P = 35 and profit = 25 × 25 = 625 mu. A rival’s lowest AC is 25 mu, so the incumbent sets 24 mu: Q = 36 and profit = 14 × 36 = 504 mu. Deterrence costs 121 mu a period and is worthwhile only if entry would cost the incumbent more.

Types of price leader: dominant firm (largest) and barometric (best at reading market conditions).

7.8.5 PED and revenue

PED	Price rise	Price fall	MR
Above 1 (elastic)	TR falls	TR rises	Positive
Equal to 1	No change	No change	Zero
Below 1 (inelastic)	TR rises	TR falls	Negative

Straight-line demand: the upper half is elastic, PED = 1 at the midpoint and the lower half is inelastic. TR peaks at the midpoint.

Kinked demand (oligopoly)

• Upper section: elastic, because rivals do not follow a price rise.
• Lower section: inelastic, because rivals follow a price cut.
• Either price change lowers TR, so price is stable.
• MR is discontinuous: a vertical gap at the kink. MC can shift within the gap with no change in price or output.
• Weakness: it does not explain how the price was reached; firms do change prices.

Worked reminder: PED and revenue

Price falls from 80 to 72 (a 10% fall) and quantity rises from 500 to 560 (a 12% rise). PED = 12/10 = 1.2, so demand is elastic. TR rises from 80 × 500 = 40,000 to 72 × 560 = 40,320.

Must-know distinctions

• Sales maximisation (most units without loss) versus revenue maximisation (highest TR).
• Satisficing (a target) versus survival (staying in business).
• First degree (each person) versus second degree (quantity) versus third degree (group).
• Limit pricing (stays above cost, deters) versus predatory pricing (below cost, eliminates).
• Price leadership (open following) versus a cartel (formal agreement).

Quick self-test

1. State the rule for profit maximisation.
2. A firm sells 50 units for TR 500 at TC 420. Selling 51 gives TR 508 and TC 429. Should it produce the 51st?
3. Which objective maximises output subject to no loss?
4. At what value of PED is TR at a maximum on a straight-line demand curve?
5. Price rises 5% and quantity falls 8%. Find PED and say what happens to TR.
6. Name the three conditions for effective price discrimination.
7. A customer buys 30 units on a tariff of 4 mu for each of the first 10 units and 2 mu for the rest. What is the total paid?
8. Is demand elastic or inelastic above the kink?
9. What is predatory pricing?
10. Name two types of price leader.

Answers

1. Produce where MR = MC, with MC cutting MR from below.
2. MR = 508 - 500 = 8 and MC = 429 - 420 = 9. MR is below MC, so no.
3. Sales maximisation, at AR = AC.
4. PED = 1 (MR = 0).
5. PED = 8/5 = 1.6, elastic. TR falls.
6. Price-setting power; ability to separate the markets and stop resale; different PEDs.
7. 10 × 4 + 20 × 2 = 80 mu.
8. Elastic.
9. Pricing below cost to force out a rival or deter entry, then raising price later.
10. Dominant firm and barometric.

Where marks are usually lost

• Writing “profit is highest where revenue is highest”.
• Naming the three degrees but not saying what differs (the basis of the price).
• Giving conditions for price discrimination without the idea of preventing resale.
• Stating that the higher price goes to the more elastic market.
• Describing limit pricing as pricing below cost.
• Giving a list of consequences with no judgement about who gains, who loses and by how much.
• Drawing kinked demand with no explanation of why rivals respond differently to rises and cuts.
• Leaving out the formula or working in a PED and revenue calculation.

Official syllabus

Cambridge International AS and A Level Economics (9708) syllabus for examination in 2026, 2027 and 2028, published by Cambridge University Press & Assessment, section 7.8.