Firm objectives, pricing policies and revenue
Firm objectives, pricing policies and revenue: build the core model, apply it to evidence and qualify conclusions where outcomes depend on context.
9708 section 7.8; A Level. Checked against Cambridge's 2026–2028 Version 2 (latest version published December 2025) and 2029 Version 1 (published September 2026). Cambridge states that neither version has significant changes affecting teaching. Always follow the syllabus for the candidate's examination year.
Before you begin
Work on paper. Try each question before revealing help, and explain why your method works.
Quick readiness check
What is required for effective price discrimination?
What you will learn
- Explain profit maximisation and alternative firm objectives
- Compare degrees and conditions of price discrimination
- Evaluate limit pricing, predatory pricing and price leadership
- Relate PED to revenue on ordinary demand
- Explain revenue implications of a kinked demand curve
Core model and terms
Profit maximisation is the traditional objective, but firms may pursue survival, satisficing, sales or revenue maximisation. Price discrimination charges different prices for the same product for reasons other than cost; it requires market power, separable groups and limited resale. First-, second- and third-degree schemes differ in how prices vary across individuals, quantity or groups. Effects depend on access, output and redistribution between customers and firms.
Apply and evaluate
Limit pricing may deter entry; predatory pricing means pricing below cost to drive rivals out with a later recoupment strategy; price leadership occurs when other firms follow a leading firm. On a normal downward-sloping demand curve, price and total revenue move in opposite directions when demand is elastic and together when inelastic. A kinked-demand model predicts asymmetric rival responses around the current price, but does not prove prices can never change.
Pause and explain
Which statement best applies firm objectives, pricing policies and revenue?
Worked example
A firm sells 100 units at $20. A price reduction to $18 raises sales to 120 units. Calculate both revenues and explain the direction.
Show the worked solution
- Initial TR = 20 × 100 = $2,000
- New TR = 18 × 120 = $2,160
- Revenue rises over this interval, consistent with an elastic response
Answer Initial TR = 20 × 100 = $2,000 → New TR = 18 × 120 = $2,160 → Revenue rises over this interval, consistent with an elastic response
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Write your answer and reasoning first. Use a hint only if you are stuck. The model solution is for self-checking; your written work is not automatically marked.
A firm sells 100 units at $20. A price reduction to $18 raises sales to 120 units. Calculate both revenues and explain the direction.
Give me a hint
Multiply price by quantity before and after the change.
Compare my reasoning
- Initial TR = 20 × 100 = $2,000
- New TR = 18 × 120 = $2,160
- Revenue rises over this interval, consistent with an elastic response
Initial TR = 20 × 100 = $2,000 New TR = 18 × 120 = $2,160 Revenue rises over this interval, consistent with an elastic response
Look for these in your work
- Initial TR = 20 × 100 = $2,000
- New TR = 18 × 120 = $2,160
- Revenue rises over this interval, consistent with an elastic response
A cinema charges different prices to students and adults, can verify eligibility and prevents ticket resale. Which conditions support third-degree price discrimination?
Give me a hint
Identify separable customer groups and the ability to prevent arbitrage.
Compare my reasoning
- Students and adults are distinguishable groups
- Eligibility can be checked
- Resale is restricted, supporting separate prices if demand conditions differ
Students and adults are distinguishable groups Eligibility can be checked Resale is restricted, supporting separate prices if demand conditions differ
Look for these in your work
- Students and adults are distinguishable groups
- Eligibility can be checked
- Resale is restricted, supporting separate prices if demand conditions differ
Why might an incumbent use limit pricing before a rival enters?
Give me a hint
Connect the current price to the entrant’s expected profitability.
Compare my reasoning
- A lower price can reduce the entrant’s expected return
- Entry may be deterred if the price remains viable for the incumbent
- The strategy depends on costs and credible expectations
A lower price can reduce the entrant’s expected return Entry may be deterred if the price remains viable for the incumbent The strategy depends on costs and credible expectations
Look for these in your work
- A lower price can reduce the entrant’s expected return
- Entry may be deterred if the price remains viable for the incumbent
- The strategy depends on costs and credible expectations
In a kinked-demand model, rivals match price cuts but not price rises. Explain the predicted shape of marginal revenue near the current price.
Give me a hint
Trace the asymmetric rival response into the demand curve.
Compare my reasoning
- A price cut gains less demand if rivals follow
- A price rise loses more demand if rivals do not
- The demand kink creates a discontinuity in marginal revenue around the current output
A price cut gains less demand if rivals follow A price rise loses more demand if rivals do not The demand kink creates a discontinuity in marginal revenue around the current output
Look for these in your work
- A price cut gains less demand if rivals follow
- A price rise loses more demand if rivals do not
- The demand kink creates a discontinuity in marginal revenue around the current output
Common mistakes
- Assuming price discrimination always raises total welfare or describing a kinked-demand model as proof prices are permanently fixed.
What can you explain now?
What is required for effective price discrimination?
Compare with the explanation
Market power, separable demand groups and limited resale
The firm needs control over price, different willingness to pay and a way to prevent arbitrage.
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Before moving on, explain the central idea in firm objectives, pricing policies and revenue and state one condition that could change its effect.
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