The objectives of firms, fixed, variable and total costs, average cost, total and average revenue, and how profit is calculated and why it matters for producers.

What this dot point is asking

AQA wants you to state the main objectives of firms, define fixed, variable, total and average cost, define total and average revenue, and calculate profit. Calculate questions appear on Paper 1, so learn the formulae and always show your working with the right symbols ($P$ for price, $Q$ for quantity).

The objectives of firms

Most firms aim to maximise profit, because profit is the reward to enterprise and the money owners keep after paying all costs. But firms can have other objectives:

• Survival, especially for a new firm or in a downturn.
• Growth in size or market share, to gain market power or economies of scale.
• Increasing sales revenue, which managers may be rewarded on.
• Social or ethical aims, such as cutting pollution or paying fair wages.

These aims can conflict: cutting prices to grow market share may lower profit in the short run.

Costs

For example, if a firm has fixed costs of 2,000 pounds and variable costs of 3,000 pounds to make 1,000 units, then $TC = \pounds 5{,}000$ and $AC = \frac{5000}{1000} = \pounds 5$ per unit. As output rises, fixed costs are spread over more units, which tends to pull average cost down.

Revenue

If a firm sells 1,000 units at 8 pounds each, $TR = 8 \times 1000 = \pounds 8{,}000$ and $AR = \pounds 8$, which is just the price.

Profit

Using the figures above, with $TR = \pounds 8{,}000$ and $TC = \pounds 5{,}000$, profit is $8000 - 5000 = \pounds 3{,}000$.

Why costs, revenue and profit matter

Profit drives supply. If a good becomes more profitable (a higher price or lower costs), firms supply more of it; if it becomes unprofitable, firms supply less or leave the market. A rise in costs shifts supply to the left because each unit earns less profit, while a fall in costs shifts supply to the right. This links costs and profit straight back to the supply curve and shows how profit signals where scarce resources should go.

Worked calculation

Try this

Q1. A firm sells 400 units at 7 pounds each. State its total revenue. [2 marks]

• Cue. $TR = 7 \times 400 = \pounds 2{,}800$.

Q2. Explain one objective a firm might have other than maximising profit. [3 marks]

• Cue. Growth: a firm may cut prices to win market share and become larger, gaining market power and economies of scale, even if profit falls in the short run.