OxfordAQA AS and A-level Economics: Cost, revenue, profit and elasticity (9640) – Revision Notes

These notes condense quantitative skills QS6 and QS8 from section 3.5 of the OxfordAQA International AS and A-level Economics specification (9640), version 1.2. Skills in section 3.5 can be assessed in any unit. Marginal values are named in QS6 as an A2 requirement, and the marginal revenue link to elasticity is in section 3.3.2.4, which is extra International A2 content. The elasticity and cost content otherwise comes from International AS sections 3.1.2.2, 3.1.2.4 and 3.1.3.3 to 3.1.3.5. The study guide has the full explanations. Test yourself with the practice questions. All figures here are invented.

Related pages: operation of markets revision notes, the costs, scale and revenue revision notes, the course hub, the printable checklist and the free 10-minute diagnostics.

Formulas to know

Measure	Formula	Stage
TC	FC + VC	AS and A2
AFC, AVC	FC ÷ output, VC ÷ output	AS and A2
AC	TC ÷ output = AFC + AVC	AS and A2
MC	change in TC ÷ change in output	A2
TR	price × quantity	AS and A2
AR	TR ÷ quantity (= price at one price)	AS and A2
MR	change in TR ÷ change in output	A2
Profit	TR − TC	AS and A2
Profit per unit	AR − AC	AS and A2
PED	%ΔQ demanded ÷ %Δ price	AS and A2
YED	%ΔQ demanded ÷ %Δ income	AS and A2
XED	%ΔQ demanded of A ÷ %Δ price of B	AS and A2
PES	%ΔQ supplied ÷ %Δ price	AS and A2
MR and PED	MR = P × (1 + 1/PED), PED negative	A2

Cost, revenue and profit: method in steps

1. Write the formula and the units (per day, per month).
2. Split total cost into FC and VC if the question gives only one of them.
3. Total first, then average: divide by output last.
4. Marginal values need two rows: subtract, then divide by the change in output.
5. Check: AFC + AVC should equal AC, and TR − TC should equal (AR − AC) × output.

Worked reminder. A laundrette has FC of 500 a week and a constant 3 variable cost per wash. At 400 washes: VC = 3 × 400 = 1,200; TC = 500 + 1,200 = 1,700; AC = 1,700 ÷ 400 = 4.25. If TC rises to 1,790 at 410 washes, MC = (1,790 − 1,700) ÷ 10 = 9. MC (9) is above AC (4.25), so AC will rise.

Must-know distinctions

• AC is TC ÷ output; MC is the cost of the extra unit.
• AVC ignores FC; AC does not.
• Revenue is not profit. Profit needs costs.
• Normal and abnormal profit: normal profit is the minimum return needed to keep the firm in the industry and it varies between industries (3.3.2.5). A profit calculation of TR − TC compares revenue with the costs you are given, so say what the costs include.

Elasticity: method in steps

1. Percentage change = (new − old) ÷ old × 100.
2. Divide the quantity change by the cause.
3. Keep the sign. Write the value to 2 decimal places or as the question asks.
4. Classify: above 1 elastic; below 1 inelastic; 1 unit elastic; 0 perfectly inelastic.
5. Interpret in context and, if asked, link to revenue.

Result	Meaning
PED between 0 and −1	Inelastic: a price rise lifts TR
PED below −1	Elastic: a price rise cuts TR
YED positive	Normal good (above 1: income elastic)
YED negative	Inferior good
XED positive	Substitutes
XED negative	Complements
PES below 1	Inelastic supply (slow or costly to expand)

Worked reminder. A snack bar cuts the price of a wrap from 5.00 to 4.50 (−10%) and demand is inelastic with PED −0.4, so quantity rises 4%. With 1,000 sold, TR goes from 5.00 × 1,000 = 5,000 to 4.50 × 1,040 = 4,680, a fall of 6.4%. An inelastic demand makes a price cut a poor revenue move.

Elasticity on a straight-line demand curve. The slope is constant but elasticity is not: demand is more elastic at high prices and low quantities, and less elastic at low prices and high quantities. TR peaks where PED is −1.

Determinants to quote. PED: availability of substitutes, necessity or luxury, share of income, time. YED: whether the good is a necessity or a luxury. XED: how close the goods are. PES: spare capacity, stock levels, time to produce, how mobile the factors of production are.

PED and revenue at a glance

PED (ignoring sign)	Price rises	Price falls
Below 1	TR rises	TR falls
1	TR unchanged	TR unchanged
Above 1	TR falls	TR rises

Sketch of a straight-line demand curve (vertical axis price, horizontal axis quantity):

price
 |\   elastic (PED below -1): TR rises as price falls
 | \
 |  \--- midpoint: PED = -1, TR at its maximum, MR = 0
 |   \
 |    \  inelastic (PED between 0 and -1): TR falls as price falls
 +------\---- quantity

A2: marginal revenue and PED. Positive MR means elastic demand and TR rising as output rises. Zero MR means unit elasticity. Negative MR means inelastic demand and TR falling as output rises. Worked reminder: at a price of 24 with PED −3, MR = 24 × (1 − 1/3) = 16. A profit-maximising firm sets MR equal to MC, and MC is positive, so it operates where MR is positive, which means on the elastic part of its demand curve.

Interpretation chains and evaluation

Use a chain of three links: the number, what it means, then the decision or effect.

• PED −0.6 on tram fares: a 10% rise in fares cuts passengers by about 6%, so TR rises. The operator may raise fares. Evaluation: the estimate comes from past data, and over a longer period people may find alternatives, so demand becomes more elastic.
• YED +2.5 for takeaway meals: demand grows faster than income, so a firm in this market gains most in a boom and loses most in a recession. Evaluation: the value may differ for lower-income and higher-income households.
• XED −1.5 between printers and ink: a printer maker that cuts the printer price can expect higher ink sales. Evaluation: a single value does not show brand loyalty or compatibility rules.
• PES 0.5 for a crop: a price rise brings only a small rise in output in the short run, so prices stay high until planting adjusts. Evaluation: storage and imports can raise short-run supply.

General evaluation points: other things are rarely equal; elasticity differs along a demand curve; short-run and long-run values differ; and a higher TR is not automatically a higher profit.

Quick self-test

1. A cafe has FC of 500 and VC of 1,200 at 400 coffees. State TC.
2. State AC at that output.
3. TC rises from 1,700 to 1,790 when output rises from 400 to 410. State MC (A2).
4. Price 15, sales 80 units, TC 950. State TR and profit.
5. Price rises 5% and quantity demanded falls 8%. State PED and classify it.
6. Income rises 4% and demand falls 2%. State YED and classify the good.
7. The price of good B rises 12% and demand for good A falls 6%. State XED and the relationship.
8. Price rises from 40 to 44 and quantity supplied from 250 to 270. State PES.
9. Price 18, PED −2. State MR (A2).
10. Why can a firm with inelastic demand raise TR by raising price, yet still see profit fall?

Answers

1. TC = 500 + 1,200 = 1,700.
2. AC = 1,700 ÷ 400 = 4.25.
3. MC = 90 ÷ 10 = 9.
4. TR = 15 × 80 = 1,200; profit = 1,200 − 950 = 250.
5. PED = −8 ÷ 5 = −1.6, elastic.
6. YED = −2 ÷ 4 = −0.5, an inferior good.
7. XED = −6 ÷ 12 = −0.5, complements.
8. %ΔP = 10%, %ΔQ = 8%, PES = 0.8, inelastic.
9. MR = 18 × (1 − 0.5) = 9.
10. TR rises, but costs may rise by more, for example if a higher price needs costly changes, or if the fall in output does not cut fixed costs. Profit is TR − TC, so check both.

Where marks are usually lost

• Using the wrong starting value in a percentage change.
• Leaving out the minus sign, so a complement looks like a substitute.
• Saying “elastic” because the answer is large in absolute terms, without comparing it with 1.
• Not stating a conclusion in context after a correct calculation.
• Mixing up AC and MC when explaining where AC is lowest.
• Treating a rise in TR as a rise in profit.
• Calling a change in price a shift of the demand curve.
• Dividing total cost by the wrong output.
• Giving a numerical answer with no unit or no working when the question says “calculate”.

Official syllabus

OxfordAQA International AS and A-level Economics (9640), version 1.2, published by OxfordAQA: section 3.5 (QS6 and QS8), with sections 3.1.2.2, 3.1.2.4, 3.1.3.3 to 3.1.3.5, 3.3.2.4 and 3.3.2.5.