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

This guide covers section 3.1.4.1, The importance of cost, revenue and profit for producers, in the AQA specification for GCSE Economics (8136), first taught from September 2017. It sits in 3.1, How markets work, which is Paper 1. Productivity and economies of scale (3.1.4.2 and 3.1.4.3) are separate topics and are not taught here. Every firm, country and figure below is invented for practice and is illustrative only.

Pair this guide with the revision notes and the practice questions. For the whole of Paper 1 see the How Markets Work guide and exam preparation. The AQA GCSE Economics hub, the checklist and the free diagnostics help you find gaps.

What you must be able to do

Specification point	What it means for you
Business objectives	Explain profit, sales growth and increasing market share as aims of a firm
Types of costs	Identify and calculate total, average, fixed and variable costs
Types of revenue	Calculate total revenue and average revenue
Profit	Use total revenue - total costs = profit, and explain how a firm may raise it
Importance for producers	Explain how higher prices imply higher profits and an incentive to expand production
Moral and ethical considerations	Explain how producers’ motives may conflict with ethical and moral interests

Business objectives

An objective is a goal that guides a firm’s decisions. You must know the three below. Many firms pursue more than one, and the mix changes with the firm’s size, age and market.

• Profit: the aim of earning more total revenue than total costs. A firm may try to make as much profit as possible, or settle for a satisfactory amount.
• Sales growth: increasing the number of units sold or the value of sales over time. It can be measured as a percentage change.
• Increasing market share: raising the firm’s portion of all sales in its market.

Market share (%) = (sales of the firm / sales of the whole market) x 100

Worked example: market share and growth. Riverside Paddles (illustrative) sells £72,000 of paddles a year in a market worth £600,000.

Market share = 72,000 / 600,000 x 100 = 12%
Target share 15% of an unchanged market = 0.15 x 600,000 = £90,000
Extra sales needed = 90,000 - 72,000 = £18,000
Sales growth if sales reach £81,000 = (81,000 - 72,000) / 72,000 x 100 = 12.5%

Objectives can pull in different directions. Cutting prices to win market share usually lowers profit on each unit sold. A new firm may accept low profit for a time to build sales, while an established firm with loyal customers may focus on profit. Always tie your answer to the firm in the question.

Types of cost

Fixed costs do not change when output changes, for example rent, insurance and a manager’s salary. Variable costs change with output, for example materials, packaging and pay per item made. Whether a cost is fixed or variable depends on how it is paid, so read the wording. A salary is fixed. Pay for each paddle finished is variable.

Term	Meaning	Formula
Total fixed cost (TFC)	All fixed costs added up	Given or added
Total variable cost (TVC)	All variable costs added up	AVC x output
Total cost (TC)	Everything the firm pays to produce	TFC + TVC
Average fixed cost (AFC)	Fixed cost per unit	TFC / output
Average variable cost (AVC)	Variable cost per unit	TVC / output
Average cost (AC)	Cost per unit	TC / output, or AFC + AVC

Worked example: costs. Riverside Paddles pays rent £2,400, insurance £600 and an equipment lease £1,000 a month. Each paddle needs wood £18, finish £4, packaging £3 and energy £5. It makes 200 paddles.

TFC = 2,400 + 600 + 1,000 = £4,000
AVC = 18 + 4 + 3 + 5 = £30
TVC = 30 x 200 = £6,000
TC  = 4,000 + 6,000 = £10,000
AFC = 4,000 / 200 = £20
AC  = 10,000 / 200 = £50   (check: 20 + 30 = 50)

Here variable cost per unit is held at £30 to keep the arithmetic simple. Average fixed cost falls as output rises because the same fixed bill is shared between more units:

Output	TFC (£)	TVC (£)	TC (£)	AFC (£)	AVC (£)	AC (£)
100	4,000	3,000	7,000	40.00	30	70.00
200	4,000	6,000	10,000	20.00	30	50.00
300	4,000	9,000	13,000	13.33	30	43.33
400	4,000	12,000	16,000	10.00	30	40.00

Total fixed cost stays at £4,000 in every row. Total cost still rises, because total variable cost rises.

Types of revenue

Total revenue (TR) is the money from sales: TR = price x quantity sold. Average revenue (AR) is the revenue earned on each unit: AR = TR / quantity sold. If every unit sells at one price, AR equals the price.

At £65 a paddle, 200 paddles give TR = 65 x 200 = £13,000 and AR = 13,000 / 200 = £65.

AR can differ from the list price when the firm sells at different prices. Suppose Riverside sells 150 paddles at £65 and clears 50 at £55:

TR = (150 x 65) + (50 x 55) = 9,750 + 2,750 = £12,500
AR = 12,500 / 200 = £62.50

Profit

Profit = total revenue - total costs. A negative answer is a loss. Profit per unit is AR - AC.

Worked example: profit. From the figures above, at 200 paddles and £65:

Profit = 13,000 - 10,000 = £3,000
Profit per paddle = 65 - 50 = £15   (check: 15 x 200 = 3,000)

Check your answer by working both ways. If total profit is not profit per unit times units sold, something is wrong.

How a firm may raise profit

Profit rises if revenue rises by more than costs, or costs fall without losing revenue. In the specification’s words, a firm may aim to increase profit by reducing average costs and/or increasing revenues. Take Riverside’s £3,000 profit as the starting point (200 paddles, £65).

Action	Working	New profit
Lower average cost: a cheaper wood supplier cuts AVC by £2 to £28	TR 13,000; TC = 4,000 + 28 x 200 = 9,600	£3,400
Raise revenue by advertising: £500 extra fixed cost, sales rise to 240	TR = 65 x 240 = 15,600; TC = 4,500 + 30 x 240 = 11,700	£3,900
Raise price to £70, sales fall to 180	TR = 12,600; TC = 4,000 + 30 x 180 = 9,400	£3,200
Raise price to £75, sales fall to 120	TR = 9,000; TC = 4,000 + 30 x 120 = 7,600	£1,400

The last row shows that a higher price does not guarantee higher total profit (the £70 row gains only because sales fall little). A higher price raises the profit on each unit sold, but if customers buy far fewer units, total revenue and profit can fall. How far sales fall depends on price elasticity of demand, covered in 3.1.3. A firm should compare total profit before and after, not just the price.

Why higher prices encourage expansion

Holding costs the same, a higher market price means a bigger gap between price and average cost on each unit. At £65 with AC £50, profit per paddle is £15. If the price rises to £75, profit per paddle becomes £25. Producers expect higher profits, so existing firms produce more and new firms may enter. This is why a supply curve slopes upward: higher prices give producers the incentive to supply more.

A short chain for an exam answer: price rises, so profit per unit rises (costs unchanged), so supplying more is more attractive, so firms expand output. Add that the incentive only works if the firm can produce more without its costs rising sharply.

Moral and ethical considerations

A firm chasing profit may be tempted to cut average costs or raise revenue in ways that harm others. The specification says producers’ motivations may conflict with ethical and moral interests. Common cases:

• paying workers very low wages or using unsafe working conditions to cut variable costs
• releasing waste into a river instead of paying to dispose of it safely
• exaggerating what a product can do, to raise sales and revenue
• using cheap materials that are unsustainable or harm the environment

Worked example: a conflict. A clothing maker (illustrative) sells 20,000 shirts at £16. Its average cost is £14. It then pays less for dye by letting waste run into a stream, cutting average cost to £11.50.

Profit before = (16 - 14) x 20,000 = £40,000
Profit after  = (16 - 11.50) x 20,000 = £90,000
Extra profit  = £50,000

The firm gains £50,000, but local people lose clean water and the stream’s wildlife is harmed. The firm has put profit ahead of the interests of others.

Evaluating the conflict

A good evaluation weighs both sides and reaches a judgement:

• Against acting unethically: a firm that is exposed may lose customers and its reputation, pay fines or face legal action, and find it harder to hire workers. Those costs can outweigh the saving over time.
• For the firm: in the short run profit rises, owners and shareholders benefit, and a firm in a tough market may feel it must cut costs to survive.
• Context: the answer depends on how strong the laws are, whether customers know and care, and whether the firm is large enough to be noticed.
• Judgement: ethical conduct often protects long-run profit, so a firm that sees only the short run risks losing more than it gains. Not every ethical choice raises profit, and some cost the firm money, so a firm may need regulation or customer pressure to behave well.

Common errors

• Treating a salary as variable because it is paid every month. It is fixed unless it changes with output.
• Dividing total variable cost by output and calling it average cost. That is AVC. AC needs total cost.
• Forgetting that total cost includes fixed cost when working out profit.
• Saying a price rise always raises profit. Compare total revenue and total cost before and after.
• Giving ethical conflicts without saying who is harmed or how the firm gains.
• Giving no unit. Write £ and, for average figures, per unit.

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.