1.4.7 Profit

Specification Coverage: AQA unit 1.4.7 - Profit. This section covers the concepts of normal profit, supernormal profit, and losses, as well as the role of profit in a market economy.

Key Definitions

Profit is the difference between total revenue and total costs.

\[ \text{Profit} = \text{Total Revenue} - \text{Total Costs} \]

Normal profit: The minimum profit required to keep a firm in the industry, so \( TR = TC \). Also known as the break-even point.

Abnormal/Supernormal profit: Any profit above normal profit, so \( TR > TC \).

Loss: When \( TR < TC \).

Normal profit is a cost, not a bonus. It is the opportunity cost of the entrepreneur staying in this industry, so it is already counted inside the firm's costs. On a diagram that means a firm making normal profit sits where AR = AC, and only the area above AC is supernormal profit. Such a firm is breaking even in economic terms even though its accounts would show a positive figure.

Profit Maximisation Rule

Firms maximise profit by producing where \( MC = MR \).

Diagrammatic Representation of Profits and Losses

Firm diagram showing supernormal profit as the shaded area where average revenue exceeds average cost
Figure 1: A firm making supernormal profit, where AR (price) is above AC at the profit-maximising output Qpm. The shaded area represents supernormal profit.
Firm diagram showing a loss as the shaded area where average cost exceeds average revenue at the chosen output
Figure 2: A firm making a loss, where AR (price) is below AC at the profit-maximising output Qpm. The shaded area represents the loss.

Role of Profit in a Market Economy

  • Incentive for entrepreneurship: Profit motivates individuals to start and manage businesses, taking on the risks associated with entrepreneurship.
  • Signal to allocate resources: Profit signals to firms where resources are most valued, guiding the allocation of resources in the economy.
  • Economic growth: Profit can be reinvested into businesses, leading to expansion, innovation, and overall economic growth.
  • Driver of competition: Profit encourages firms to compete, leading to better products, lower prices, and increased efficiency in the market.
  • Reward to investors/owners: Profit provides a return on investment to those who have invested capital in the business, rewarding them for their risk and contribution.

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Five questions on Profit from the AQA A-Level papers, 2018–2022, 2 to 25 marks. Each one links straight to the page of the official mark scheme where its answer begins.

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