AQA A-Level Economics (7136) · The Operation of Markets
Specification points
- Total, average and marginal revenue.
- Normal and supernormal profit; the objectives of firms.
- The profit-maximising rule and alternative objectives.
Revenue
- Total revenue (TR) = price × quantity.
- Average revenue (AR) = TR ÷ Q = price.
- Marginal revenue (MR) = the change in TR from one more unit.
In perfect competition AR = MR (price is fixed to the firm); for a price-maker, MR lies below AR.
Profit
- Normal profit — the minimum return needed to keep a firm in the industry (AR = ATC); treated as a cost.
- Supernormal (abnormal) profit — profit above normal (AR > ATC), possible where barriers to entry exist.
Profit is maximised where MC = MR.
Key definitions
| Term | Definition |
|---|---|
| Normal profit | The reward that just keeps a firm in the industry (AR = ATC). |
| Supernormal profit | Profit above normal profit (AR > ATC). |
| Profit maximisation | Producing where marginal cost equals marginal revenue. |
Objectives of firms
Firms may not always maximise profit because of the principal-agent problem or wider goals:
- Revenue maximisation (MR = 0), sales maximisation (normal profit), satisficing, survival, growth or social objectives.
The role of profit
Profit signals where resources should go, rewards enterprise and risk, and funds investment and dynamic efficiency. Supernormal profit attracts entry in competitive markets, competing profits away over time.
Worked example
A firm's AR is £12 and ATC is £9, so it makes supernormal profit of £3 per unit. In a competitive market this attracts new entrants, raising supply and lowering price until only normal profit remains — the long-run competitive outcome.
Common exam mistakes
- Saying profit is maximised where TR is highest (it is where MC = MR).
- Confusing normal and supernormal profit.
- Forgetting that normal profit is counted as a cost.
Exam technique
Use cost/revenue diagrams to identify profit and the MC = MR output, and evaluate why firms might pursue objectives other than profit maximisation.
Quick revision
- TR = P×Q; AR = price; MR = change in TR.
- Profit max: MC = MR. Normal profit: AR = ATC; supernormal: AR > ATC.