AQA A-level Economics: Revenue, profit and technological change (7136) – Revision Notes

These notes condense the revenue, profit and technological change content of the AQA AS and A-level Economics specification (version 1.3, 29 June 2022), A-level sub-section Production, costs and revenue (3.1.4 on the AQA website, 4.1.4 in the combined PDF). The specification does not label any of this content as AS-only or A-level-only. For full explanations, read the study guide, then test yourself with the practice questions. Use the course hub, the printable checklist and the free diagnostics to find gaps. Every firm and figure here is invented.

Definitions to know

Term	Definition
Total revenue (TR)	Revenue from all units: price multiplied by units sold
Average revenue (AR)	Revenue per unit sold (TR ÷ Q), which is the price
Marginal revenue (MR)	Extra TR from one more unit sold (ΔTR ÷ ΔQ)
Profit	Total revenue − total costs
Normal profit	The least reward that keeps the entrepreneur in this activity; counted as a cost
Abnormal (supernormal) profit	Profit above normal profit: TR greater than TC with normal profit included
Invention	The discovery or creation of a new idea, product or process
Innovation	The first commercial use of an invention
Creative destruction	New products, methods and firms replacing old ones, destroying existing markets and profits while creating new ones

Revenue relationships

Situation	AR	MR	TR
Price taker (horizontal demand)	Equals price	Equals AR	Rises in a straight line
Firm with a downward-sloping demand curve	Equals price, falls as Q rises	Below AR	Rises, peaks, then falls
Linear demand, P = a − bQ	a − bQ	a − 2bQ on a smooth line	Peak where MR = 0

Why the key links hold

• AR is the demand curve because AR = TR ÷ Q = P, and the demand curve shows the price at which each quantity sells.
• MR is below AR because a price cut applies to all units sold, so the firm gives up revenue on units it could already sell.
• MR is the slope of the TR curve. TR climbs while MR is positive, tops out where MR is zero and then declines.
• Demand is elastic where MR is positive, unit elastic where MR is zero and inelastic where MR is negative.

Method in steps: build a revenue table

1. Write price and quantity in two columns.
2. Calculate TR = P × Q for each row.
3. Calculate MR as TR now minus TR in the row above (for one-unit steps).
4. Check: MR is below price in every row after the first, and TR is highest where MR changes sign.

Worked reminder

Suppose P = 32 − 2Q for Firm D, an invented craft business.

Q	P = AR	TR	MR
5	22	110	14
6	20	120	10
7	18	126	6
8	16	128	2
9	14	126	−2

The 6th unit’s MR is 120 − 110 = 10. TR is greatest at 8 units (128), because the 9th unit has negative MR.

For one-unit steps with P = a − bQ, MR of the Qth unit is a − b(2Q − 1). For Firm D, the 6th unit gives 32 − 2 × 11 = 10, which matches the table.

Price taker reminder

A grower sells at 15 a crate whatever the output. At 1, 2, 3 and 4 crates, TR is 15, 30, 45 and 60, and MR is 15 each time. AR = MR = price.

Drawing revenue curves

• Put price or revenue (£) up the side and quantity along the bottom.
• Label the downward-sloping line AR = D.
• Draw MR from the same vertical intercept, steeper, and crossing the horizontal axis halfway to where AR meets it.
• For TR, draw a hill that peaks at the output where MR crosses the horizontal axis.
• For a price taker, draw one horizontal line labelled AR = MR = D.

Profit

Method in steps: abnormal profit with an owner’s opportunity cost

1. Calculate accounting profit: TR − costs actually paid.
2. Subtract the owner’s next best earnings. This is normal profit.
3. Positive result: abnormal profit. Zero: normal profit only. Negative: below normal, so long-run exit is likely.

Worked reminder. Shop E has revenue 52,000 and total costs of 47,500, with normal profit already included in the costs. Profit = 52,000 − 47,500 = 4,500, all abnormal. If it sells 1,500 units, abnormal profit per unit is 4,500 ÷ 1,500 = 3.

Must-know distinctions

Often confused	Difference
Accounting profit v abnormal profit	Abnormal profit also subtracts the owner’s opportunity cost
Highest TR v highest profit	The output with most revenue ignores rising costs
Normal profit v zero profit	Normal profit is a cost, so earning it is not a loss
Invention v innovation	Discovery versus first commercial use
Lower costs v lower fixed costs	Technology often cuts variable costs but raises fixed costs

Role of profit in a market economy

1. Signal: abnormal profit draws in firms and resources.
2. Incentive: rewards risk-taking and innovation.
3. Source of funds: retained profit finances investment.
4. Discipline: losses push weak firms to improve or leave.

Evaluate by asking whether profit reflects efficiency or market power, whether it ignores external costs and whether firms can enter freely.

Technological change

Chain of effects

New technology leads to new methods of production, which raise productivity (output per worker), which lowers costs per unit if output is high enough, which allows lower prices or higher profit. It may also create new products and markets, shrink old ones and change how many firms compete.

Worked reminder

A workshop with 6 workers makes 480 units a week, or 80 each. After adopting new machines, the same 6 workers make 690, or 115 each. The rise is (115 − 80) ÷ 80 = 43.75%, or 43.8% to 1 decimal place.

Market structure effects

Effect	Reason
More competition	Lower start-up costs, online sales, easier access to customers
Less competition	High research costs, patents, network effects, large early-mover advantage

Creative destruction in four steps

1. An innovation creates a new product or a cheaper method.
2. The innovator earns abnormal profit for a time.
3. Old products and firms lose sales, and some jobs disappear.
4. Imitators enter, profit falls toward normal and the next innovation begins.

Quick self-test

1. A firm sells 600 units at 7.50 each. Calculate TR.
2. In question 1, what is AR?
3. For P = 32 − 2Q, calculate MR for the 6th unit.
4. At what output is TR greatest for P = 32 − 2Q?
5. What is MR for a price taker selling at 15?
6. What does it show about TR and demand elasticity when MR is zero?
7. A firm has TR of 52,000 and TC of 47,500, including normal profit. Is the profit normal or abnormal?
8. Why is MR below AR for a firm facing a downward-sloping demand curve?
9. State the difference between invention and innovation.
10. Output per worker rises from 80 to 115. Calculate the percentage rise.
11. Give one reason an innovator’s abnormal profit tends to fall over time.
12. Give one way technological change might raise a market’s concentration.

Answers

1. 600 × 7.50 = 4,500.
2. 4,500 ÷ 600 = 7.50, the price.
3. TR at 6 is 120 and at 5 is 110, so MR = 10.
4. 8 units, where TR is 128 and the 9th unit has MR of −2.
5. 15, the market price.
6. TR has stopped rising and is at its maximum, and demand is unit elastic at that point.
7. 52,000 − 47,500 = 4,500, which is abnormal profit.
8. A price cut applies to all units, so extra sales cost revenue on earlier units.
9. Invention is the discovery of a new idea or process, innovation is its first commercial use.
10. (115 − 80) ÷ 80 = 43.75%, or 43.8%.
11. Rivals enter or imitate, so competition reduces price and margin.
12. High research costs, patents or network effects give an early mover a dominant position.

Evaluation prompts

• Revenue: a firm may not know its demand curve exactly, so revenue forecasts rest on estimates, and rivals’ reactions can shift the curve.
• Profit: abnormal profit may be temporary or may reflect barriers to entry, so judge it by how long it lasts.
• Technology: the gain depends on the size of the market, the speed of imitation, the cost of the change and what happens to displaced workers.
• Conclude with a judgement that states which factor matters most and why.

Where marks are usually lost

• Writing MR = P without saying the firm must be a price taker.
• Drawing MR and AR parallel, or MR above AR.
• Stating that profit is maximised where TR is maximised.
• Labelling the vertical axis “price” on a TR diagram, where it should be revenue.
• Forgetting that normal profit is a cost, so a firm earning it is not making a loss.
• Giving an invention example when the question asks for an innovation.
• Saying technology lowers costs without referring to productivity, fixed costs or output level.
• Describing creative destruction without linking it to temporary abnormal profit and entry.
• Giving a list of roles for profit with no evaluation.

Official syllabus

AQA, AS and A-level Economics specification (7135 and 7136), version 1.3, 29 June 2022, first teaching September 2015. Sections covered: marginal, average and total revenue; profit; technological change.