AQA GCSE Economics: Business objectives, costs, revenue and profit (8136) – Revision Notes

These notes condense section 3.1.4.1, The importance of cost, revenue and profit for producers, from the AQA specification for GCSE Economics (8136), first taught from September 2017. For full explanations, use the study guide, then test yourself with the practice questions. Related reading: the How Markets Work guide, the AQA GCSE Economics hub, the checklist and the free diagnostics. All firms and figures are invented and illustrative.

Objectives in one table

Objective	Meaning	How it is measured
Profit	Revenue above costs	Total revenue - total costs
Sales growth	More units or more sales value over time	% change in sales
Increasing market share	A bigger portion of the whole market	Firm’s sales / market sales x 100

• Firms often have more than one objective, and they can conflict. Winning share by cutting price lowers profit per unit.
• A new firm often values growth more than profit at first. An established firm may focus on profit.

Cost formulas

Term	Formula
Total cost (TC)	TFC + TVC
Total variable cost (TVC)	AVC x output
Average fixed cost (AFC)	TFC / output
Average variable cost (AVC)	TVC / output
Average cost (AC)	TC / output, or AFC + AVC

• Fixed: does not change with output (rent, insurance, salaries, lease).
• Variable: changes with output (materials, packaging, pay per item).
• AFC always falls as output rises, because the fixed bill is shared out.
• Decide fixed or variable from how the cost behaves, not from how often it is paid.

Revenue and profit formulas

Term	Formula
Total revenue (TR)	Price x quantity sold
Average revenue (AR)	TR / quantity sold (equals price if one price is charged)
Profit	TR - TC (a negative result is a loss)
Profit per unit	AR - AC

Method in steps

1. Write down what you are given and what you need.
2. Find TFC, then TVC (AVC x output), then TC.
3. Find TR (price x quantity). If prices differ, add each group’s revenue first.
4. Subtract: profit = TR - TC.
5. Check: profit per unit x units sold should equal total profit.
6. State units (£, per unit) and show working.

Worked reminder 1: costs and profit

Oakleaf Stools (illustrative) has fixed costs of £1,500 a month and variable cost of £22 per stool. It makes and sells 250 stools at £40.

TVC = 22 x 250 = £5,500
TC  = 1,500 + 5,500 = £7,000
AC  = 7,000 / 250 = £28
AFC = 1,500 / 250 = £6
TR  = 40 x 250 = £10,000
Profit = 10,000 - 7,000 = £3,000   (check: (40 - 28) x 250 = 3,000)

Worked reminder 2: three routes to higher profit

Starting from the £3,000 profit above:

Route	Working	Profit
Lower average cost: AVC falls to £20	TC = 1,500 + 20 x 250 = 6,500; 10,000 - 6,500	£3,500
Price falls to £38, same sales	TR = 38 x 250 = 9,500; 9,500 - 7,000	£2,500
Sell 100 stools only, at £30	TR = 3,000; TC = 1,500 + 2,200 = 3,700	-£700 (loss)

Ways to raise profit: a checklist

• Reduce average costs: find cheaper suppliers, cut waste, negotiate a lower rent, or spread fixed costs over more units. Name the cost that falls and say whether it is fixed or variable.
• Increase revenue: sell more units (for example through advertising), or charge a higher price. Say what might happen to sales if the price rises.
• Do both: the biggest gain usually comes when costs fall and revenue rises together.
• Check the net effect: extra advertising is a cost, so revenue must rise by more than the new cost for profit to increase.

Higher prices and the incentive to expand

Chain: price rises, so profit per unit rises (if costs are unchanged), so supplying more is more attractive, so firms expand and new firms may enter. This explains the upward-sloping supply curve. A higher price does not always mean higher total profit, because quantity sold may fall.

Moral and ethical considerations

The specification says producers’ motives may conflict with ethical and moral interests.

• Conflicts: low wages, unsafe conditions, pollution, misleading claims, harmful or unsustainable materials.
• Why a firm may do it: lower average costs or higher revenue, so more profit.
• Who loses: workers, local residents, customers, the environment.
• Evaluation: reputation, fines and lost customers can cancel the gain; the answer depends on laws, customer awareness and firm size. Conclude with a clear judgement.

Worked reminder 3: share, growth and mixed prices

A small juice stall (illustrative) sells £30,000 of juice a year in a town market worth £250,000. Next year its sales rise to £33,000 and the market grows to £330,000.

Share now  = 30,000 / 250,000 x 100 = 12%
Sales growth = (33,000 - 30,000) / 30,000 x 100 = 10%
Share next year = 33,000 / 330,000 x 100 = 10%

Sales grew by 10% but market share fell from 12% to 10%, because the whole market grew faster than the stall did. This is why sales growth and market share are separate objectives.

Mixed prices: the stall sells 400 cups at £3 and 100 cups at £2 in a closing-down sale.

TR = (400 x 3) + (100 x 2) = 1,200 + 200 = £1,400
AR = 1,400 / 500 = £2.80

Evaluation frame for ethics questions

Use this order and keep each step to a sentence or two:

1. Point: the firm can raise profit by a named action, such as cutting waste-disposal costs.
2. Evidence: use any figures given, such as average cost falling from £14 to £11.50.
3. Harm: name who loses and how, such as local residents or workers.
4. Counter-argument: fines, a damaged reputation and lost customers may cost more than the saving.
5. Judgement: say which side is stronger for this firm, and why.

Must-know distinctions

• Revenue is not profit. Revenue is money in; profit is revenue minus costs.
• Total versus average. Average figures are per unit; totals are for all units.
• AVC versus AC. AC includes fixed costs as well.
• Sales growth versus market share. A firm’s sales can grow while its market share falls, if the whole market grows faster.
• Higher price versus higher profit. A price rise lifts profit per unit but may cut sales.

Quick self-test

1. Oakleaf’s sales are £18,000 in a market worth £120,000. Calculate its market share.
2. Is insurance a fixed or a variable cost? Is wood for stools?
3. Fixed costs are £1,500 and AVC is £22. Calculate total cost at 250 stools.
4. Calculate average cost and average fixed cost at 250 stools.
5. At a price of £40, calculate total revenue and profit for 250 stools (use your answer to question 3).
6. A theatre earns £9,120 from 240 tickets sold at mixed prices. Calculate average revenue.
7. The stool price falls to £38 and sales stay at 250. Calculate the new profit.
8. AVC falls to £20 at 250 stools and the price is £40. Calculate the new profit.
9. Output rises to 500 stools. Calculate average fixed cost.
10. Explain why a higher price gives producers an incentive to expand.
11. Sales of 25,000 units rise by 8%. Calculate the new sales level.
12. State one way a producer’s motive for profit could conflict with ethical interests.

Answers

1. 18,000 / 120,000 x 100 = 15%.
2. Insurance is fixed. Wood is variable.
3. TVC = 22 x 250 = 5,500; TC = 1,500 + 5,500 = £7,000.
4. AC = 7,000 / 250 = £28; AFC = 1,500 / 250 = £6.
5. TR = 40 x 250 = £10,000; profit = 10,000 - 7,000 = £3,000.
6. 9,120 / 240 = £38.
7. TR = 38 x 250 = 9,500; profit = 9,500 - 7,000 = £2,500.
8. TC = 1,500 + 20 x 250 = 6,500; profit = 10,000 - 6,500 = £3,500.
9. 1,500 / 500 = £3.
10. A higher price widens the gap between price and average cost, so profit per unit rises. Firms therefore want to produce and sell more.
11. 25,000 x 1.08 = 27,000 units.
12. For example, cutting costs by paying very low wages or by polluting, which harms workers or local people.

Where marks are usually lost

• Calling a cost fixed or variable without checking whether it changes with output.
• Dividing by the wrong quantity, such as using TVC instead of TC to find AC.
• Leaving fixed costs out of total cost before working out profit.
• Giving a final figure with no working, so a slip cannot be traced.
• Writing “profit” when the answer is revenue, or the reverse.
• Claiming a price rise always raises profit.
• Describing an ethical issue without saying who is affected and why the firm gains.
• Listing points in an evaluation without a final judgement.
• Missing the £ sign or the “per unit” label on average figures.

Official syllabus

AQA, GCSE Economics (8136) specification, for first teaching from September 2017: section 3.1.4.1, The importance of cost, revenue and profit for producers.