OxfordAQA International AS and A-level Economics: Revenue, profit and technology (9640) – Revision Notes

These notes condense the study guide for the OxfordAQA International AS and A-level Economics specification (9640), version 1.2, sections 3.3.2.4 to 3.3.2.6. Section 3.3 is extra International A2 content. Quantitative skills (section 3.5) can be assessed in any unit; A2 assessments need marginal values. All figures here are invented. When you are ready, use the practice questions, the course hub, the printable checklist and the free 10-minute diagnostics.

Key definitions and formulas

Term	Meaning or formula
Total revenue (TR)	Price times quantity sold
Average revenue (AR)	Revenue per unit, equal to price when all units sell at one price
Marginal revenue (MR)	Change in TR ÷ change in Q
Profit	TR − total costs
Normal profit	Least reward that stops the owner switching to the next best use; counted as a cost
Abnormal (supernormal) profit	Any profit left after normal profit is covered
Invention	Creating a new idea, product or process
Innovation	Bringing an invention to market for the first time
Creative destruction	New products and methods replacing old ones, destroying old firms and markets
Patent	Legal protection that gives the inventor sole rights for a limited period

Revenue curves (3.3.2.4)

• AR curve = demand curve.
• Firm with market power, straight-line demand P = a − bQ: MR = a − 2bQ. MR starts at the same price-axis point as AR and is twice as steep. It cuts the quantity axis at half of AR’s intercept.
• Price taker: AR = MR = price. Demand is horizontal and TR is a straight line from the origin.
• MR is below AR because a price cut on extra units also lowers the price on the units already sold.

Method: building a revenue table.

1. Put price from the demand curve against each quantity.
2. TR = P × Q.
3. MR = this TR − last TR, divided by the change in quantity.
4. Check: MR falls faster than P, and TR peaks where MR changes sign.

Worked reminder. Demand P = 72 − 3Q for an invented tile-maker.

Q	P = AR	TR	MR = 72 − 6Q
4	60	240	48
6	54	324	36
8	48	384	24
10	42	420	12
12	36	432	0
14	30	420	−12

TR is greatest at 12 tiles (432, price 36), where MR = 0. For one unit steps, MR of the 10th tile = 420 − 405 = 15, which equals the curve value 72 − 6 × 9.5 = 15 at the mid-point between 9 and 10 units.

MR, TR and price elasticity of demand

MR	Demand	Effect of a price cut on TR
Positive	Elastic (PED greater than 1 in size)	TR rises
Zero	Unit elastic (PED equal to 1 in size)	TR at its maximum
Negative	Inelastic (PED less than 1 in size)	TR falls

Worked reminder. From Q = 4 (P = 60) to Q = 6 (P = 54): %ΔQ = 2 ÷ 4 = +50%; %ΔP = −6 ÷ 60 = −10%; PED = 50 ÷ −10 = −5, elastic. TR rises from 240 to 324, which agrees with positive MR.

Price-taker reminder. A farm sells at 7 a unit. At 300 units TR = 2,100 and AR = 7. Selling 301 units gives TR = 2,107, so MR = 7. The price does not change with the firm’s output.

Evaluation. A firm may not aim to maximise revenue. It may target profit or market share. Revenue curves assume the firm knows its demand curve, which is hard to know in practice.

Profit (3.3.2.5)

Method: abnormal profit.

1. Accounting profit = revenue − explicit costs.
2. Subtract the opportunity cost of the owner’s time and capital (normal profit).
3. The remainder is abnormal profit; a negative figure means the owner earns less than normal.

Worked reminder. Revenue 95,000, explicit costs 71,000, owner’s best alternative earnings 18,000. Accounting profit = 24,000. Abnormal profit = 24,000 − 18,000 = 6,000.

Why normal profit differs between industries. Risk, the skills and capital needed, how long returns take, and how hard it is to sell specialist assets if the firm fails.

Role of profit in a market economy.

• A signal about what consumers value.
• An incentive to take risks and cut costs.
• Reallocation: entry into profitable markets.
• A source of finance for investment.
• Discipline: losses force improvement or exit.

Chain: abnormal profit → entry → higher supply → lower price → profit falls towards normal. If barriers to entry exist, abnormal profit lasts and its signalling value falls.

Technological change (3.3.2.6)

Area	Possible effect
Methods of production	More capital-intensive, automation, new materials
Productivity	More output per worker or per hour
Efficiency and costs	Lower variable cost, perhaps higher fixed cost; lower average cost at high output
Products and markets	New goods and markets; existing markets may shrink or disappear
Market structure	Lower barriers (more firms) or higher barriers (research cost, patents, scale)

Worked reminder. Process A: fixed cost 10,000 and variable cost 4 a unit. Process B: fixed cost 25,000 and variable cost 1.50 a unit. Equal average cost where 10,000 + 4Q = 25,000 + 1.5Q, so 2.5Q = 15,000 and Q = 6,000. At 4,000 units, AC is 6.50 (A) and 7.75 (B). At 10,000 units, AC is 5.00 (A) and 4.00 (B). The new process helps only above 6,000 units.

Creative destruction chain: innovation → temporary abnormal profit → imitation → falling prices and profit → old firms and skills lost → next innovation.

Patents.

• For: reward and incentive to invent; recovering research costs; disclosure of ideas.
• Against: monopoly prices; blocks rivals; delays follow-on innovation; legal expense.
• Judgement: depends on the length and breadth of protection and how costly the research is.

Government role: funds research (public universities and agencies), tax relief and subsidies, education and training, infrastructure, patent law, competition policy and public procurement. Knowledge spreads to other firms, so private firms tend to under-invest; but governments can back the wrong projects. Invention and innovation occur in both the public and private sectors.

Must-know distinctions

• AR versus MR: AR is price per unit; MR is the extra revenue from one more unit.
• TR peaks where MR = 0; profit peaks where the extra revenue equals the extra cost. Whenever extra output has a positive marginal cost, that is at a lower output than the TR peak.
• Accounting profit versus abnormal profit: the second deducts normal profit.
• Invention versus innovation.
• Productivity versus average cost: higher productivity lowers cost per unit only if the extra cost of the new inputs is smaller than the saving per unit. A machine that doubles output per worker but costs a great deal to lease may still raise average cost.
• Price taker versus price maker: a price taker has AR = MR = price; a price maker has MR below AR.

Quick self-test

1. For P = 72 − 3Q, calculate TR at 8 units.
2. For the same demand, calculate the MR of the 10th unit using TR at 9 and 10 units.
3. Explain why MR is less than AR for a firm with market power.
4. At which output is TR greatest, and what are price and TR?
5. Calculate PED between Q = 4 (P = 60) and Q = 6 (P = 54), and say what happens to TR.
6. A price taker sells 300 units at 7. Calculate TR and MR.
7. Revenue 95,000, explicit costs 71,000, owner’s alternative earnings 18,000. Calculate abnormal profit.
8. Distinguish invention from innovation.
9. Output per hour rises from 25 to 31 units. Calculate the percentage rise.
10. Process A (fixed cost 10,000, variable cost 4) and process B (fixed cost 25,000, variable cost 1.50): find the output at which they have the same average cost.
11. Give two arguments for and one against patents.
12. State two reasons normal profit differs between industries.

Answers

1. P = 72 − 24 = 48; TR = 48 × 8 = 384.
2. TR at 9 = 45 × 9 = 405; TR at 10 = 42 × 10 = 420; MR = 15.
3. To sell more units the firm must cut price on all units, so the extra unit adds its price but loses revenue on units already sold.
4. MR = 0 at Q = 12; P = 36; TR = 432.
5. %ΔQ = +50%; %ΔP = −10%; PED = −5 (elastic); TR rises from 240 to 324.
6. TR = 2,100; MR = 7.
7. 95,000 − 71,000 = 24,000; 24,000 − 18,000 = 6,000.
8. An invention creates something new; an innovation puts it to commercial use for the first time.
9. (31 − 25) ÷ 25 = 24%.
10. 15,000 ÷ 2.5 = 6,000 units.
11. For: reward and incentive to invest in research; the idea is disclosed. Against: the holder can charge monopoly prices.
12. Any two of: different risk; different skills or capital needed; different waiting time for returns; assets hard to resell.

Where marks are usually lost

• Writing MR = AR when the firm’s demand curve slopes down.
• Taking MR from a single price change without dividing by the change in quantity.
• Calculating a percentage change on the new value instead of the original.
• Reading the highest TR as the highest profit.
• Forgetting to deduct normal profit before naming abnormal profit.
• Using invention and innovation as the same thing in an explanation.
• Claiming that technology lowers average cost without saying at what output.
• Listing patent points without a judgement on length, breadth and cost of research.

Official syllabus

OxfordAQA International AS and A-level Economics (9640), version 1.2: sections 3.3.2.4, 3.3.2.5 and 3.3.2.6, with quantitative skills in section 3.5.