An objective is a goal a business sets itself. The spec names three:
Profit (often profit maximisation): making the biggest possible gap between revenue and costs. It rewards the owners and pays for investment.
Sales growth: selling more units, or raising sales revenue, year after year.
Increasing market share: winning a bigger percentage of all the sales in the market, often by taking customers from rivals.
Other objectives AQA credits: survival (common for new firms or in a recession), satisficing (making enough profit to keep the owners happy), and social or ethical aims (such as a social enterprise).
A firm may give up some profit now for market share or growth, hoping to earn more profit later.
Exam tipBusiness objectives are not government objectives. ‘Economic growth’, ‘low inflation’ and ‘full employment’ earn nothing when the question asks about a business. Two answers that mean the same (such as ‘revenue maximisation’ and ‘income maximisation’) earn only 1 mark.
Profit maximisation
Aiming for the largest possible profit.
Market share
A firm's sales as a percentage of total sales in the market.
Satisficing
Aiming for a satisfactory level of profit rather than the most possible.
3.1.4.1
Fixed and variable costs
Fixed costs do not change when output changes. They must be paid even if nothing is made. Examples: rent, insurance, business rates, managers' salaries, heating the building, loan repayments, advertising.
Variable costs change directly with output: make more, pay more. Examples: raw materials, ingredients, packaging, energy used by machines, delivery charges per item.
Heating and lighting the building are usually treated as fixed: the shop is heated whether it sells 10 items or 100.
Staff paid by the hour, whose hours rise and fall with output, are a variable cost; salaried staff are a fixed cost.
From April 2026, the National Living Wage for workers aged 21 and over was £12.71 an hour, and the government announced £13.21 from April 2027 (GOV.UK, checked November 2026). A rise like this raises the costs of firms that employ staff on the minimum rate.
Exam tipIn June 2022 only 42% of students chose heating as the fixed cost in a multiple-choice question. Ask: would this bill change if the firm made one more item? If not, it's fixed.
Fixed costs
Costs that do not change with output, such as rent.
Variable costs
Costs that change with output, such as raw materials.
3.1.4.1
Total cost and average cost
Total cost (TC) = fixed costs + variable costs.
Average cost (AC) = total cost ÷ output: the cost of making each unit, on average.
Average fixed cost = fixed cost ÷ output; average variable cost = variable cost ÷ output.
If a table gives total cost at zero output, that figure is the fixed cost (nothing is made, so there are no variable costs).
As output rises, the fixed cost is spread over more units, so average fixed cost falls. (Why average cost falls in bigger firms is in Economies and Diseconomies of Scale.)
Bars of soap a week
Fixed cost
Variable cost (£3 a bar)
Total cost
Average cost
0
£500
£0
£500
–
100
£500
£300
£800
£8.00
200
£500
£600
£1,100
£5.50
400
£500
£1,200
£1,700
£4.25
Bramblecote Soap Co. (invented): fixed cost stays at £500; variable cost grows with output
Worked exampleBramblecote Soap Co. (invented) has fixed costs of £500 a week and a variable cost of £3 a bar. Calculate total cost and average cost at 400 bars a week.
Variable cost = £3 × 400 = £1,200Variable cost per unit × output.
Total cost = £500 + £1,200 = £1,700Fixed + variable.
Worked exampleUsing the same data, calculate average fixed cost at 400 bars.
Average fixed cost = £500 ÷ 400
£1.25 a bar
Exam tipCosts calculations are a weak area: only about a quarter of students got full marks for average fixed cost in June 2023. Write the formula first, then put the numbers in.
Total cost
Fixed costs + variable costs.
Average cost
Total cost ÷ output: the cost per unit.
3.1.4.1
Total revenue and average revenue
Revenue: the money that comes in from selling the product.
Total revenue (TR) = price × quantity sold.
Average revenue (AR) = total revenue ÷ quantity sold. If every unit sells at the same price, AR equals the price.
Revenue is not profit: costs haven't been taken off yet.
Revenue can rise by selling more, or by raising the price, but a higher price may cut the number sold (how much depends on price elasticity of demand).
Worked exampleBramblecote Soap Co. sells 400 bars a week at £6 each. Calculate total revenue.
Total revenue = price × quantity = £6 × 400
£2,400 a week
Worked exampleA market stall (invented) takes £4,800 from selling 600 phone cases, some at full price and some in a sale. Calculate average revenue.
Average revenue = total revenue ÷ quantity = £4,800 ÷ 600
£8 per case
Total revenue
Price × quantity sold.
Average revenue
Total revenue ÷ quantity sold.
3.1.4.1
Profit: total revenue minus total costs
Profit = total revenue − total costs. If costs are bigger than revenue, the answer is negative: a loss.
Another route: profit = (price − average cost) × quantity.
Profit is the reward for enterprise: it pays the owners for taking the risk.
Two ways to raise profit (spec): cut average costs (cheaper suppliers, less waste, higher productivity) and/or raise revenue (sell more, or raise the price if demand is price inelastic).
Profit is the gap between total revenue and total cost
Worked exampleBramblecote Soap Co. sells 400 bars at £6. Total cost is £1,700. Calculate profit both ways.
AC = £1,700 ÷ 400 = £4.25; profit = (£6 − £4.25) × 400 = £700Profit per unit × quantity.
£700 a week
Exam tip‘Explain one way the firm could increase profit’ needs the how: ‘buy flour in bulk to cut the cost per loaf, so the gap between price and average cost widens, so profit rises.’
Profit
Total revenue − total costs.
Loss
When total costs are greater than total revenue.
3.1.4.1
Higher prices, higher profits and the incentive to produce more
When the price of a product rises (and costs don't), each unit earns more profit.
That gives producers an incentive to expand production: existing firms make more, and new firms may join the market.
This is why the supply curve slopes upwards: a higher price leads to a higher quantity supplied (an extension of supply).
Falling prices do the reverse: profits shrink, so firms supply less and some leave the market.
This is how prices act as signals: they move resources towards what consumers want most.
Exam tipChain it: price rises → profit per unit rises → firms want to produce more → quantity supplied extends. Each arrow is a step examiners look for.
Incentive
Something that encourages a person or firm to act in a certain way, such as the chance of more profit.
3.1.4.1
When the profit motive clashes with ethics
Ethics is about what is morally right. The spec says producers' motives may conflict with ethical and moral interests.
Examples of conflict: paying suppliers so little that they can't pay fair wages; buying from factories with unsafe working conditions; dumping waste to avoid disposal costs; using tax loopholes to pay as little tax as possible; unfair recruitment; misleading advertising; using market power to charge very high prices.
Why firms might act ethically anyway: customers may pay more for fair-trade or green products; a good reputation builds loyalty; staff may be better motivated; laws and regulators punish some behaviour.
Why some don't: ethical choices usually cost more (higher costs → lower profit), and rivals who cut corners may undercut them on price.
Paying workers more, or choosing a fair-trade supplier, is not a conflict with ethics: it is the ethical choice.
Exam tipQuestions on ethics need a cost to someone: who is harmed (workers, suppliers, the environment, customers) and how the firm's profit motive leads to it.
Ethics
Ideas about what is morally right or wrong.
Fair trade
Trading arrangements that guarantee producers in poorer countries a minimum price and decent working conditions.
3.1.4.2
Production v productivity
Production: the process of turning inputs (land, labour, capital, enterprise) into goods and services. It is the total amount made.
Productivity: output per unit of input, usually output per worker (or per worker per hour). It measures efficiency.
Labour productivity = output ÷ number of workers (÷ hours, if asked per hour).
Production can rise just by hiring more workers, with productivity unchanged. Productivity rises only if each worker makes more.
Same workers, more output each: productivity rises (invented data)
Worked exampleFive workers make 160 units in an 8-hour day (invented). After training they make 240. Calculate labour productivity per worker per hour before and after.
Before: 160 ÷ (5 × 8) = 160 ÷ 40 = 4 units per worker per hour.
After: 240 ÷ 40 = 6 units per worker per hour.
% change = (6 − 4) ÷ 4 × 100 = 50%.
4 before, 6 after: a 50% rise
Exam tipExaminers report students muddling low productivity with low production. A big factory can produce a lot but still have low productivity if it needs lots of workers to do it.
Production
The process of converting inputs into goods or services.
Productivity
Output per unit of input, such as output per worker per hour.
3.1.4.2
What raises productivity, and why it matters
Factors that raise productivity: training and education; better machinery and technology; specialisation and the division of labour (see Markets, Economic Sectors and Specialisation); better motivation (pay, bonuses, good conditions); better management and organisation.
Benefits to the firm: lower average costs (the same wage bill makes more units), so higher profit or lower prices; more competitive against rivals at home and abroad.
Benefits to workers: firms can afford higher wages; jobs may be more secure.
Benefits to consumers and the economy: lower prices, better quality, and economic growth.
Costs: training and machines cost money up front, and some jobs may be replaced by machines.
Exam tipFor a benefit, take one more step: ‘higher productivity → lower labour cost per unit → lower average cost → the firm can cut prices and win customers’.
Labour productivity
Output per worker in a given time.
Division of labour
Splitting production into small tasks, with each worker specialising in one.
Genious