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

This guide follows the AQA AS and A-level Economics specification (version 1.3, 29 June 2022) for the A-level sub-section Production, costs and revenue (3.1.4 on the AQA website, 4.1.4 in the combined PDF). It covers the three content blocks Marginal, average and total revenue, Profit, and Technological change. The specification does not label any of this content as AS-only or A-level-only. The content sits in the Paper 1 content area, and Paper 3 can draw on any of it. Production, productivity and costs are taught in separate Marlbridge units, so this guide concentrates on revenue, profit and technological change. All firms, countries and figures below are invented.

Use the course hub and the printable checklist to track your progress. Companion pages: revision notes and practice questions. For price elasticity of demand, see demand and elasticities. To find your weak spots first, try the free diagnostics.

What you must be able to do

Spec block	You must be able to
Marginal, average and total revenue	Calculate all three from data; explain why AR is the firm’s demand curve; link AR to MR and MR to TR; draw and interpret revenue curves
Profit	Define profit as TR minus total costs; separate normal from abnormal (supernormal) profit; explain the role of profit in a market economy
Technological change	Separate invention from innovation; explain effects on methods, productivity, efficiency, costs, products, markets and market structure; link to creative destruction

1. Total, average and marginal revenue

Total revenue (TR) is price multiplied by quantity sold: TR = P × Q. Average revenue (AR) is TR divided by quantity: AR = TR ÷ Q. Because TR = P × Q, AR is simply the price. Marginal revenue (MR) is the extra revenue earned by selling one more unit: MR = ΔTR ÷ ΔQ.

Worked example: a firm with market power

Workshop A, an invented ceramics firm, faces the demand curve P = 48 − 4Q, where Q is units per week and P is in pounds. To sell more it must cut its price on every unit.

Q	P = AR	TR = P × Q	MR = change in TR
1	44	44	44
2	40	80	36
3	36	108	28
4	32	128	20
5	28	140	12
6	24	144	4
7	20	140	−4
8	16	128	−12

Working: the MR of the 4th unit is 128 − 108 = 20, and of the 7th unit 140 − 144 = −4.

Three patterns appear in the table:

1. MR is always below AR once the firm must cut price to sell more.
2. TR rises while MR is positive, peaks at 6 units (TR = 144; MR is 4 for the 6th unit and −4 for the 7th), and falls when MR is negative.
3. MR falls by 8 for each extra unit, twice the 4 by which price falls.

Why MR is below AR

Take the move from 3 to 4 units. The 4th unit sells for 32, which adds 32 to revenue. But the price of the first three units falls from 36 to 32, a loss of 3 × 4 = 12. So MR = 32 − 12 = 20. Selling more costs the firm revenue on units it was already selling.

Why AR is the demand curve

At each price, the quantity consumers buy is read from the demand curve. The revenue per unit the firm receives at that quantity is that same price. So AR = P at every output, and the AR curve and the demand curve are one line. For a linear demand curve P = a − bQ, the MR line leaves the price axis at the same height and falls at double the rate, so on a smooth line MR = a − 2bQ. For Workshop A, MR = 48 − 8Q, which meets the horizontal axis at 6 units, half the 12 units where AR meets it.

A sketch in words: draw price up the vertical axis and quantity along the horizontal. AR slopes down from 48 to 12 units. MR starts at the same 48, falls twice as fast and crosses the horizontal axis at 6 units. TR, on its own diagram, is a hill that peaks at 6 units.

 Price
 48 |*
 36 |    M    A
 24 |         M        A
 12 |              M            A
  0 +------------------M-----------------A---
     0        3        6        9        12  Quantity
      M = MR (meets axis at 6), A = AR = demand (meets at 12)

The link to elasticity

Where MR is positive, demand is price elastic: a price cut raises TR. At 6 units, where MR = 0, demand is unit elastic. Beyond it, MR is negative and demand is inelastic, so a price cut lowers TR. A firm facing this demand would not choose to sell beyond 6 units unless it is chasing sales for another reason.

A price taker

A firm that must accept the market price faces a horizontal demand curve. Farm B, an invented wheat grower, sells at 240 a tonne whatever it supplies.

Tonnes	AR	TR	MR
1	240	240	240
2	240	480	240
3	240	720	240
4	240	960	240

Each extra tonne adds exactly 240, so AR = MR = price and TR rises in a straight line from the origin. No price cut is needed to sell more, so there is no loss on earlier units.

2. Profit

Profit = total revenue − total costs (TC). Using Workshop A with an invented total cost schedule:

Q	TR	TC	Profit = TR − TC
2	80	46	34
3	108	57	51
4	128	70	58
5	140	85	55
6	144	102	42
8	128	142	−14

Of the outputs shown, profit is largest at 4 units (58) and turns into a loss at 8 units (−14). The output that gives the most TR (6 units) is not the output that gives the most profit, because costs rise as output rises. The rule for choosing output is covered in the objectives of firms unit, not here.

Normal and abnormal (supernormal) profit

Total costs in economics include the opportunity cost of the owner’s own effort and capital. Normal profit is the least reward that stops the entrepreneur moving to their next best option. It is counted as a cost. Abnormal (supernormal) profit is any profit above normal profit, meaning TR exceeds TC once normal profit is included.

Worked example. Studio S, an invented design studio, has revenue of 96,000. It pays 70,000 for rent, materials and wages. Its owner could earn 22,000 in another job.

• Accounting profit = 96,000 − 70,000 = 26,000.
• Abnormal profit = 26,000 − 22,000 = 4,000.

If revenue were 92,000, accounting profit would be 22,000 and abnormal profit zero: the owner earns exactly normal profit. If revenue were 90,000, profit would be 2,000 below normal, and in the long run the owner is likely to leave.

The role of profit in a market economy

• Signal: abnormal profit shows that consumers value a good highly relative to its cost, so other firms enter and resources move towards it.
• Incentive: the chance of profit rewards risk-taking, innovation and cost cutting.
• Source of funds: retained profit finances investment, including research.
• Discipline: losses push inefficient firms to improve or leave.

Evaluation: profit can reflect market power rather than efficiency, can encourage a short-term view, and ignores external costs such as pollution. How well profit allocates resources depends on how easily firms can enter, which links to market structure.

3. Technological change

Invention is the discovery or creation of a new idea, product or process. Innovation is putting it to commercial use for the first time. A laboratory in Country A that finds a cheap way to make thin solar film has made an invention. The firm that first sells roof tiles made from it has made an innovation. Economic gains mostly depend on innovation, because only an applied idea changes what is produced and sold.

Effects of technological change

• Methods of production: machines or software replace or support labour, and production may become more capital-intensive.
• Productivity: output per worker rises. In an invented example, 5 workers produce 400 units a week (80 each). After automation they produce 600 (120 each), a rise of (120 − 80) ÷ 80 = 50%.
• Efficiency and costs: variable cost per unit often falls, though fixed costs may rise. Firm C has fixed costs of 40,000 and variable cost of 6 a unit. A new process raises fixed costs to 100,000 and cuts variable cost to 2.5.

Output	Average cost before	Average cost after
10,000	(40,000 + 60,000) ÷ 10,000 = 10.00	(100,000 + 25,000) ÷ 10,000 = 12.50
20,000	(40,000 + 120,000) ÷ 20,000 = 8.00	(100,000 + 50,000) ÷ 20,000 = 7.50

Average costs are equal where 40,000 + 6Q = 100,000 + 2.5Q, so 3.5Q = 60,000 and Q = 17,143 units (to the nearest unit). Below this output the new process costs more per unit, so technological change helps costs only if volume is high enough.

• New products and markets: innovation creates goods that did not exist, and it opens markets such as online delivery.
• Existing markets: an innovation can shrink or destroy an existing market. A digital ticket app could remove demand for paper-ticket kiosks.
• Market structure: it can lower barriers to entry, so more small firms compete, for example when an online platform removes the need for shops. It can also raise barriers, because heavy research costs, patents (legal protection for a limited period) and network effects can give an early mover a dominant position.

Creative destruction

Schumpeter’s term creative destruction describes how new products, methods and firms replace old ones. The innovator earns abnormal profit for a time. Imitators then enter, profit falls back towards normal and the cycle repeats with the next innovation. The “destruction” is the loss of old firms, jobs and skills. The “creative” side is higher productivity, lower prices and new goods. Links to remember: innovation leads to temporary abnormal profit, which signals and rewards, and entry then erodes it.

Evaluation points: gains are spread across the economy but losses fall on identifiable workers and firms, so the speed of change and the help given to displaced workers matter. A patent can protect profits from imitation and reward invention, but if it lasts too long it delays competition.

Common errors

• Writing MR = P. That is true only for a price taker.
• Drawing MR with the same slope as AR. For a straight-line demand curve, MR is twice as steep.
• Treating the highest TR as the highest profit.
• Counting the owner’s opportunity cost as profit instead of cost.
• Using “invention” and “innovation” as the same word.
• Saying technological change always lowers costs. Show the change in fixed and variable costs and the output level.

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. Your teacher and the AQA website hold the current version.