Total, average and marginal revenue, the distinction between normal and supernormal profit, the profit-maximising rule, and alternative objectives of firms.

What this dot point is asking

AQA wants you to define total, average and marginal revenue, distinguish normal from supernormal profit, state and apply the profit-maximising rule ($MC = MR$), and explain alternative objectives that firms may pursue. These tools are applied directly in every market structure model.

Revenue concepts

For a price-taking firm (perfect competition) AR equals MR, a horizontal line at the market price. For a price-maker facing a downward-sloping demand curve, MR lies below AR and falls twice as steeply, because to sell an extra unit the firm must lower price on all units. MR is positive while demand is elastic, zero at unit elasticity (where total revenue peaks), and negative when demand is inelastic.

Normal and supernormal profit

A firm earns supernormal profit when AR is greater than ATC at the profit-maximising output, shown by the rectangle between AR and ATC at that quantity. It makes a loss when ATC exceeds AR, and just normal profit when $AR = ATC$.

The profit-maximising rule

Alternative objectives

Not all firms profit-maximise. Alternatives include revenue maximisation (where $MR = 0$, favoured by managers paid on turnover), sales (output) maximisation (the largest output while at least covering costs, to deter rivals), satisficing (achieving satisfactory rather than maximum profit to balance the interests of different stakeholders), and pursuing social or environmental objectives. The divorce of ownership from control, the principal-agent problem, means salaried managers may pursue their own goals such as size or prestige rather than shareholder profit.

Profit, signals and efficiency

Profit is more than a reward; it is a signal and an incentive that drives the whole market mechanism. Supernormal profit signals firms to enter an industry, raising supply and competing the profit away over time; losses signal firms to exit, reducing supply. This is the engine behind the long-run adjustment in perfect competition and the reason barriers to entry matter so much in monopoly, where they prevent that adjustment. Profit also funds investment and research, so the level and durability of profit is central to the debate about dynamic efficiency.

The distinction between accounting and economic profit is worth knowing. Accounting profit subtracts only explicit costs from revenue; economic profit also subtracts implicit costs, including the opportunity cost of the owner's capital and time, which is normal profit. A firm earning zero economic profit is still earning normal profit and will stay in business, because its resources are earning their next best return. When a question asks whether a firm "should stay in the market", the test is whether it covers all costs including normal profit in the long run, and at least covers average variable cost in the short run.