What is the difference between revenue, costs, and profits in Economics?

In Economics, particularly within the Edexcel International A Levels curriculum, revenue refers to the total income generated from the sale of goods and services. Costs are the expenses incurred in the production of these goods and services. Profits are calculated by subtracting total costs from total revenue. Understanding these concepts is crucial for analyzing business behavior and decision-making.

How do businesses calculate total revenue?

Total revenue is calculated by multiplying the price per unit by the number of units sold. This is a fundamental concept in Economics and is essential for understanding business behavior. For example, if a company sells 100 units of a product at $10 each, the total revenue would be $1,000. This calculation helps businesses assess their financial performance and make informed decisions.

What are fixed and variable costs, and how do they affect profits?

Fixed costs are expenses that do not change with the level of production, such as rent and salaries. Variable costs, on the other hand, fluctuate with production volume, like raw materials and direct labor. Understanding the distinction between these costs is vital for calculating profits, as businesses need to cover both fixed and variable costs to achieve profitability. This concept is a key part of the Edexcel International A Levels Economics syllabus.

Why is understanding revenue important for business decision-making?

Understanding revenue is crucial for business decision-making because it directly impacts profitability and sustainability. By analyzing revenue trends, businesses can make informed decisions about pricing, production levels, and market strategies. This knowledge is integral to the study of business behavior in Economics, as it helps predict how businesses will respond to changes in the market.

How do economies of scale affect revenue and costs?

Economies of scale refer to the cost advantages that businesses experience as their production scale increases. As businesses grow, they can spread fixed costs over a larger number of units, reducing the average cost per unit. This can lead to increased profitability as long as revenue grows proportionally. Understanding economies of scale is essential in Economics, particularly in the context of the Edexcel International A Levels, as it explains how businesses can achieve competitive advantages in the market.

Why is "Not recognising that average revenue equals price (AR = P)" a common mistake in Revenue (Revenue Costs and Profits)?

Why it happens: Students treat AR as a separate mysterious quantity rather than seeing the Q cancel in TR ÷ Q. How to avoid it: Show the algebra: AR = TR ÷ Q = (P × Q) ÷ Q = P. Average revenue ALWAYS equals price, which is why the AR curve is the demand curve. Source: WEC13 Examiner Reports

Why is "Drawing MR equal to (or on top of) AR for a price-maker" a common mistake in Revenue (Revenue Costs and Profits)?

Why it happens: Students carry over the price-taker result (AR = MR) to a firm with a downward-sloping demand curve. How to avoid it: MR = AR ONLY for a price-taker (horizontal demand). For a price-maker, MR is BELOW AR, shares AR's price-intercept and is TWICE as steep, cutting the axis at half AR's quantity-intercept. Source: WEC13 Examiner Reports — recurring diagram error

Why is "Assuming AR = MR = price in every market" a common mistake in Revenue (Revenue Costs and Profits)?

Why it happens: The neat horizontal AR = MR = P line is memorised without noting it applies only under perfect competition. How to avoid it: AR = MR = price holds ONLY for a price-taker (perfect competition), where demand is perfectly elastic. Any firm with market power faces a downward-sloping AR and MR below it.

Why is "Thinking total revenue is maximised at the highest price" a common mistake in Revenue (Revenue Costs and Profits)?

Why it happens: It feels intuitive that charging more always brings in more money. How to avoid it: TR is maximised where MR = 0 (the unit-elastic mid-point of AR), NOT at the highest price. Above that price demand is elastic, so cutting price actually raises TR. Source: WEC13 Examiner Reports

Why is "Confusing revenue with profit" a common mistake in Revenue (Revenue Costs and Profits)?

Why it happens: Both are money figures, so students use them interchangeably. How to avoid it: Revenue = money coming IN (TR = P × Q). Profit = TR − TC (what is left after costs). A high revenue can still be a loss. Answer 'revenue' questions about revenue only. Source: WEC13 Examiner Reports

Why is "Getting the MR–elasticity link the wrong way round" a common mistake in Revenue (Revenue Costs and Profits)?

Why it happens: Students remember MR and PED are linked but reverse which region gives positive MR. How to avoid it: MR is POSITIVE where demand is ELASTIC (top of AR), ZERO at unit elasticity (mid-point), and NEGATIVE where demand is INELASTIC (bottom). Check with MR = P(1 − 1/|PED|).

Edexcel International A Levels Economics (XEC11-YEC11)

Revenue (Revenue Costs and Profits)

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Short Notes - Revenue (Revenue Costs and Profits)

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Detailed Study Notes

Detailed notes on Business Behavior for Edexcel International A Levels Economics, covering key concepts, explanations, examples, and exam-focused revision points.

Revenue: Total, Average & Marginal Revenue — Edexcel IAL Economics (WEC13) Study Notes

Revenue is where price, output and market power meet. Master the three revenue formulae (TR, AR, MR), see exactly why a price-taker faces a horizontal AR = MR = price line while a price-maker's MR lies below a downward-sloping AR and is twice as steep, and link MR to elasticity — the diagram-and-calculation skills that earn AO2 marks and AO3 analysis in Unit 3.

At a glance

Total revenue (TR) = the money a firm receives from sales = price × quantity ( $TR = P \times Q$ ).
Average revenue (AR) = revenue per unit = $TR \div Q$ — and this always equals the price ( $AR = P$ ).
Marginal revenue (MR) = the extra revenue from selling one more unit = $\Delta TR \div \Delta Q$ .
Price-taker (perfect competition): faces a horizontal, perfectly elastic demand curve, so AR = MR = price (all constant) and TR rises in a straight line.
Price-maker (has market power): faces a downward-sloping AR (demand) curve, so to sell more it must cut the price — MR lies below AR and is twice as steep.
For a price-maker, MR = 0 at the mid-point of AR, and TR is maximised where MR = 0 (an inverted-U TR curve).
MR ↔ PED: MR is positive when demand is elastic, zero at unit elasticity, and negative when demand is inelastic.
Revenue is not profit: profit = total revenue − total cost. Revenue is only the money coming in.

What you’ll learn

Mapped to the Pearson Edexcel International A Levels XEC11-YEC11 syllabus (2020-2026).

3.2.1 — Define and calculate total revenue, average revenue and marginal revenue.
3.2.1 — Understand that average revenue equals price (AR = P).
3.2.1 — Explain the shape of TR, AR and MR for a price-taker in perfect competition (horizontal AR = MR = P).
3.2.1 — Explain the shape of TR, AR and MR for a price-maker (downward-sloping AR, MR below AR and twice as steep).
3.2.1 — Link marginal revenue to the price elasticity of demand along the AR curve.

The three revenue measures: TR, AR and MR

TR = P × Q; AR = TR ÷ Q = price; MR = ΔTR ÷ ΔQ. Learn all three and how they connect.

Revenue is the money a firm receives from selling its output — the flow of income coming in before any costs are taken out. There are three measures, and Unit 3 expects you to define and calculate all three.

Total revenue (TR) is the total money received from selling a given quantity of output:

$TR = P \times Q$

If a firm sells 200 units at £5 each, $TR = £5 \times 200 = £1{,}000$ .

Average revenue (AR) is revenue per unit sold:

$AR = \frac{TR}{Q} = \frac{P \times Q}{Q} = P$

Notice the cancelling: average revenue always equals the price. Because of this, the AR curve is the firm's demand curve — it shows the price (revenue per unit) at each quantity. This single fact, AR = P, is one of the most rewarded points in the topic.

Marginal revenue (MR) is the extra revenue from selling one more unit:

$MR = \frac{\Delta TR}{\Delta Q}$

If TR rises from £1,000 to £1,044 when the firm sells one more unit, then $MR = £44 \div 1 = £44$ . MR is the slope of the TR curve — it tells you how fast total revenue is changing.

How they connect. TR is the whole; AR spreads that whole evenly across every unit (= price); MR isolates the contribution of the last unit. The shape of all three depends on one thing: whether the firm is a price-taker or a price-maker.

TR = P × Q (total money received).
AR = TR ÷ Q = price — average revenue ALWAYS equals price.
The AR curve IS the firm's demand curve.
MR = ΔTR ÷ ΔQ (extra revenue from one more unit).
The shape of all three depends on price-taker vs price-maker.

See the full worked example for revenue (revenue costs and profits) →

The price-taker: AR = MR = price (perfect competition)

A price-taker faces a horizontal, perfectly elastic demand curve, so AR = MR = price, all constant, and TR rises in a straight line.

A price-taker is a firm with no power to set its own price — it must accept the price determined by the whole market. This is the case in perfect competition, where the firm is one of very many small sellers of an identical (homogeneous) product.

Because the firm is tiny relative to the market, it can sell as much as it likes at the going market price, but nothing at all above it (buyers would simply switch to an identical rival). Its demand curve is therefore horizontal at the market price — perfectly elastic ( $PED = \infty$ ).

Because the price is constant at every quantity:

AR = price at every output — the horizontal line is the AR (demand) curve.
MR = price too. Each extra unit is sold at the same unchanged price, so it adds exactly that price to revenue. There is no need to cut the price to sell more, so nothing is lost on earlier units.
Therefore AR = MR = price, and all three lie on the same horizontal line.

What does TR look like? Since every unit adds the same amount (the price), total revenue rises in a straight line from the origin: sell twice as much and TR exactly doubles. Its slope is the constant price, which is exactly why $MR$ is constant.

A price-taker must accept the market price (no pricing power).
This happens in perfect competition — many firms, identical product.
The firm's demand curve is HORIZONTAL and perfectly elastic (PED = ∞).
AR = MR = price, all constant, on the same horizontal line.
TR rises in a straight line from the origin (slope = the price).

The price-maker: MR below AR and twice as steep

A price-maker faces a downward-sloping AR (demand) curve; MR shares AR's price-intercept but is twice as steep, hitting zero at the mid-point of AR.

A price-maker is a firm with market power — some ability to set its own price (a monopoly, or a firm in monopolistic competition or oligopoly). Because it is a significant seller, it faces a downward-sloping demand (AR) curve: to sell more, it must lower the price.

This creates the key difference from a price-taker. When a price-maker cuts the price to sell one extra unit, it usually has to charge that lower price on all the units it sells, not just the last one. So the extra unit brings in its price, but the firm loses a little revenue on every earlier unit. The net gain — marginal revenue — is therefore less than the price (AR).

The geometry you must be able to draw. For a straight-line AR (demand) curve, MR:

has the same vertical (price) intercept as AR — for the very first unit almost nothing is lost, so MR ≈ AR at the start;
is exactly twice as steep as AR, so it lies below AR at every positive quantity;
crosses the horizontal axis (MR = 0) at half the quantity at which AR crosses it — i.e. at the mid-point of AR.

TR is an inverted 'U'. While MR is positive, each extra unit still adds to revenue, so TR is rising. When MR = 0, TR is neither rising nor falling — it is at its maximum. Beyond that, MR is negative, so extra sales reduce TR and TR falls. Plotting TR against quantity therefore gives an inverted-U shape that peaks exactly where MR = 0.

Golden rule: a price-maker maximises total revenue at the output where MR = 0, the mid-point of the AR curve — not at the highest price.

A price-maker has market power and faces a downward-sloping AR (demand) curve.
To sell more it must cut price on ALL units, so MR < AR (below the AR curve).
MR shares AR's price-intercept but is TWICE as steep.
MR = 0 at the mid-point of AR (half AR's quantity-intercept).
TR is an inverted-U, maximised exactly where MR = 0.

See the full worked example for revenue (revenue costs and profits) →

Linking MR to price elasticity of demand

Along a straight-line AR curve, MR > 0 when demand is elastic, MR = 0 at unit elasticity, and MR < 0 when demand is inelastic.

The AR (demand) curve and MR curve tell you not just about revenue but about price elasticity of demand (PED) — and examiners reward candidates who make this link.

Along a straight-line demand (AR) curve, PED is not constant: demand is elastic at the top (high price, low quantity), unit-elastic at the mid-point, and inelastic at the bottom (low price, high quantity). Marginal revenue maps directly onto this:

Region of AR	PED	Marginal revenue	Effect of selling one more unit
Upper (top) half	Elastic ( $\lvert PED\rvert > 1$ )	MR > 0	TR rises
Mid-point	Unit-elastic ( $\lvert PED\rvert = 1$ )	MR = 0	TR at its maximum
Lower (bottom) half	Inelastic ( $\lvert PED\rvert < 1$ )	MR < 0	TR falls

Why this makes sense. When demand is elastic, cutting price to sell one more unit brings in more extra sales revenue than is lost on existing units, so MR is positive and TR rises. When demand is inelastic, the price cut needed to shift one more unit costs more (on all units) than the extra unit earns, so MR is negative and TR falls. At unit elasticity, the two effects exactly cancel — MR is zero and TR is at its peak.

This is exactly why a revenue-maximising price-maker chooses the output where MR = 0: it is producing right up to the point where demand switches from elastic to inelastic, squeezing every last pound of revenue from the market.

PED varies along a straight-line AR curve (elastic top, unit-elastic mid, inelastic bottom).
MR > 0 in the ELASTIC region → TR rising.
MR = 0 at UNIT elasticity → TR maximised.
MR < 0 in the INELASTIC region → TR falling.
A revenue-maximiser produces where MR = 0 (unit-elastic point).

Revenue is not profit — keep them separate

Revenue is money coming in; profit is what is left after costs. Profit = total revenue − total cost.

A final point that examiners flag every series: revenue is not the same as profit.

Total revenue is the money the firm receives from sales ( $TR = P \times Q$ ). It ignores costs entirely.
Profit is what is left over after paying costs:

$\text{Profit} = \text{Total revenue} - \text{Total cost}$

A firm can have a large revenue and still make a loss if its costs are higher, and a firm can maximise revenue (at MR = 0) at a completely different output from where it maximises profit (which, as you will see in the costs and profit-maximisation topics, is where MR = MC). Revenue-maximising and profit-maximising outputs are usually not the same.

So when a question asks about revenue, answer about the money coming in (TR, AR, MR) and its diagram — do not drift into costs or profit unless the question specifically asks. Keeping the two ideas separate is a quick, reliable way to protect marks.

Revenue = money coming IN (TR = P × Q); it ignores costs.
Profit = total revenue − total cost (what is left after costs).
A big revenue can still mean a loss if costs are higher.
Revenue is maximised at MR = 0; profit is maximised at MR = MC — usually different outputs.
Answer 'revenue' questions about revenue only — don't drift into profit.

Quick recap

TR = P × Q; AR = TR ÷ Q = price; MR = ΔTR ÷ ΔQ.
Average revenue ALWAYS equals price, so the AR curve is the firm's demand curve.
Price-taker (perfect competition): horizontal, perfectly elastic demand → AR = MR = price → TR a straight line.
Price-maker (market power): downward-sloping AR → MR below AR and twice as steep → MR = 0 at AR's mid-point.
For a price-maker, TR is an inverted-U maximised where MR = 0.
MR > 0 when demand is elastic, MR = 0 at unit elasticity, MR < 0 when inelastic.
Revenue is not profit: profit = total revenue − total cost.

Memorise this

Verbatim phrases and definitions Edexcel mark schemes credit.

Total revenue (TR) = price × quantity (TR = P × Q).
Average revenue (AR) = TR ÷ Q, which always equals the price (AR = P) — so the AR curve is the demand curve.
Marginal revenue (MR) = the change in total revenue from selling one more unit = ΔTR ÷ ΔQ.
Price-taker (perfect competition): horizontal, perfectly elastic demand curve, so AR = MR = price.
Price-maker: downward-sloping AR, with MR below AR and twice as steep; MR = 0 at the mid-point of AR and total revenue is maximised there.
MR is positive when demand is elastic, zero at unit elasticity and negative when demand is inelastic.

How it’s examined

Core to Unit 3 (WEC13), spec 3.2.1. Tested in Section A MCQs (identify AR = MR = P for a price-taker, or read TR/AR/MR from a table) and, above all, in Section B Q7: a short calculation in part (a) (compute TR, AR or MR from a data table, 2 marks — show the formula, substitution and answer), a 'what is meant by' definition in part (b) (4 marks), an Analyse in part (c) (6 marks, diagram expected — e.g. why a price-maker's MR lies below AR), an Examine in part (d) (8 marks, e.g. the MR–PED relationship), and a Discuss in part (e) (14 marks = KAA 8 + Evaluation 6). In Section C it can anchor a 20-mark Evaluate essay (KAA 12 + Evaluation 8), e.g. on revenue-maximising behaviour. Examiner reports repeatedly flag confusing AR with price incorrectly, drawing MR equal to AR for a price-maker, and muddling revenue with profit — fully labelled AR/MR diagrams and clean calculations secure the AO2 marks.

Sources: Pearson Edexcel International Advanced Level Economics (XEC11/YEC11) Specification, Issue 2; Edexcel IAL Economics WEC13 Examiner Reports; Edexcel IAL Economics WEC13 mark schemes. Last reviewed 2026-07-01.

Take this whole topic with you

Step-by-step worked examples — Revenue (Revenue Costs and Profits)

Step-by-step solutions to past-paper-style questions on revenue (revenue costs and profits), written exactly the way a tutor would explain them at the board.

Question type:

1Calculate MR from a revenue table
Getting startedDirect calculation• WEC13 Section B(a) style• marginal revenue, calculation, AO2
Question
A firm sells 4 units for a total revenue of £48 and 5 units for a total revenue of £55. Calculate the marginal revenue of the 5th unit. (2 marks)
Step-by-step solution
1. Step 1
  State the formula. Marginal revenue is the change in total revenue from selling one more unit.
  $MR = \frac{\Delta TR}{\Delta Q}$
2. Step 2
  Substitute. TR rises from £48 to £55 as output rises from 4 to 5 units.
  $MR = \frac{55 - 48}{5 - 4} = \frac{7}{1}$
3. Step 3
  Answer. The marginal revenue of the 5th unit is £7.
  $MR = £7$
Answer
MR = (55 − 48) ÷ (5 − 4) = £7.
Examiner tip
2/2 (AO2): 1 mark for the correct method (ΔTR ÷ ΔQ) and 1 for the answer £7. Show the subtraction — method marks are available even if the arithmetic slips. Note MR (£7) is below the price of the 5th unit (AR = 55 ÷ 5 = £11), a sign the firm is a price-maker.
2Calculate TR and AR, and confirm AR = price
Getting startedDirect calculation• WEC13 Section B(a) style• total revenue, average revenue, calculation, AO2
Question
A firm sells 250 units at a price of £8 each. Calculate its total revenue and average revenue, and state what average revenue equals. (2 marks)
Step-by-step solution
1. Step 1
  Total revenue. TR = P × Q.
  $TR = £8 \times 250 = £2{,}000$
2. Step 2
  Average revenue. AR = TR ÷ Q.
  $AR = \frac{£2{,}000}{250} = £8$
3. Step 3
  Interpret. AR = £8 = the price. Average revenue always equals price, so the AR curve is the firm's demand curve.
Answer
TR = £2,000; AR = £8 = the price (AR = P).
Examiner tip
2/2 (AO2): 1 mark for TR = £2,000, 1 for AR = £8 with the point that AR equals price. The AR = P insight is the marked idea, so state it explicitly.
3Draw the price-taker's revenue diagram
Building confidenceGraph or diagram• WEC13 Section B(c) style• price-taker, diagram, perfect competition, AO2
Question
Draw a diagram to show the average and marginal revenue faced by a price-taking firm in perfect competition, and explain its shape. (4 marks)
Step-by-step solution
1. Step 1
  Set up the axes. Put Price (P) on the vertical axis and Quantity (Q) on the horizontal axis, and label them.
2. Step 2
  Draw the line. Draw a single horizontal line at the market price and label it AR = MR = P. It is perfectly elastic (PED = ∞).
3. Step 3
  Explain why. The firm is tiny relative to the market, so it can sell any quantity at the going price but nothing above it. Each extra unit adds the same price to revenue, so MR = AR = price, all constant.
Answer
A single horizontal line labelled AR = MR = P, showing a perfectly elastic demand curve; each extra unit adds the same price to revenue.
Examiner tip
Diagram marks (AO2) are awarded for labelled axes (P and Q), the horizontal line, and the label AR = MR = P. State that the line is perfectly elastic. An unlabelled sketch scores little.
4Why a price-maker's MR lies below AR
Building confidenceGraph or diagram• WEC13 Section B(c) style• price-maker, marginal revenue, diagram, AO3
Question
Using a diagram, analyse why the marginal revenue curve lies below the average revenue curve for a price-making firm. (6 marks)
Step-by-step solution
1. Step 1
  Identify the demand curve. A price-maker has market power, so it faces a downward-sloping AR (demand) curve — to sell more it must lower the price.
2. Step 2
  The lost-revenue effect. To sell one extra unit the firm must cut the price on all units, not just the last one. So the extra unit earns its price, but revenue is lost on every earlier unit.
3. Step 3
  Net effect on MR. The gain from the extra unit minus the loss on earlier units means MR is less than the price (AR), so MR lies below AR at every positive quantity.
4. Step 4
  The geometry. For a straight-line AR, MR shares AR's price-intercept but is twice as steep, so it reaches zero at half AR's quantity-intercept (the mid-point of AR).
Answer
Because a price-maker must cut price on all units to sell one more, the marginal unit adds less than its price to revenue — so MR < AR, sharing AR's price-intercept but twice as steep.
Examiner tip
6/6 = KAA Level 3: the lost-revenue chain (cut price on all units → MR below price) plus a correct diagram (MR below AR, same price-intercept, twice as steep, cutting the axis at half AR's quantity-intercept). Diagram marks (AO2) are awarded separately.
5Find the revenue-maximising output (MR = 0)
StretchMulti-step problem• WEC13 Section B(d) style• total revenue, marginal revenue, revenue maximisation, AO2
Question
A price-maker faces the demand schedule below. Using marginal revenue, find the output that maximises total revenue. Q (units): 1, 2, 3, 4, 5; P (£): 10, 9, 8, 7, 6. (6 marks)
Step-by-step solution
1. Step 1
  Build TR = P × Q. TR at Q = 1,2,3,4,5 is £10, £18, £24, £28, £30.
2. Step 2
  Build MR = ΔTR ÷ ΔQ. MR for units 2–5 is £8, £6, £4, £2 — falling, and below the price each time.
  $MR_2 = 18-10 = £8;\; MR_3 = £6;\; MR_4 = £4;\; MR_5 = £2$
3. Step 3
  Find the peak. TR keeps rising while MR > 0. Here MR is still positive at 5 units, so within this table TR is highest at Q = 5 (£30); TR would peak exactly where MR reaches 0.
4. Step 4
  State the rule. Total revenue is maximised at the output where MR = 0 — the mid-point of the AR curve — because beyond it MR turns negative and TR falls.
Answer
TR is maximised where MR = 0. Over this schedule MR stays positive, so TR rises to its highest shown value of £30 at Q = 5; extending the schedule, TR peaks exactly where MR hits zero.
Examiner tip
Marks come from building TR and MR correctly and applying the MR = 0 rule for revenue maximisation. The key idea: TR rises while MR > 0 and falls once MR < 0, so it peaks at MR = 0.
6Link MR to elasticity along the AR curve
StretchGraph or diagram• WEC13 Section B(d) style• marginal revenue, PED, elasticity, AO3
Question
Explain the relationship between marginal revenue and the price elasticity of demand along a straight-line average revenue curve. (8 marks)
Step-by-step solution
1. Step 1
  PED varies along AR. On a straight-line AR curve, demand is elastic at the top (high P, low Q), unit-elastic at the mid-point and inelastic at the bottom.
2. Step 2
  Elastic region → MR > 0. When demand is elastic, cutting price to sell one more unit gains more in extra sales than is lost on existing units, so MR is positive and TR rises.
3. Step 3
  Unit elasticity → MR = 0. At the mid-point the two effects exactly cancel, so MR = 0 and TR is at its maximum.
4. Step 4
  Inelastic region → MR < 0. When demand is inelastic, the price cut needed to sell one more unit costs more (on all units) than the unit earns, so MR is negative and TR falls.
5. Step 5
  Formalise (A*). The link is exact: MR = P(1 − 1/|PED|). |PED| > 1 → MR > 0; |PED| = 1 → MR = 0; |PED| < 1 → MR < 0.
Answer
MR > 0 in the elastic region, MR = 0 at unit elasticity (TR maximised), and MR < 0 in the inelastic region — captured by MR = P(1 − 1/|PED|).
Examiner tip
8/8 = KAA Level 3: map each elasticity region to the sign of MR with the reasoning (gain vs lost-revenue effect), and link MR = 0 to the revenue-maximising, unit-elastic mid-point. Quoting MR = P(1 − 1/|PED|) shows top-band understanding.

Model Answers — Revenue (Revenue Costs and Profits)

High-scoring sample answers for revenue (revenue costs and profits) on the Pearson Edexcel IAL XEC11 / YEC11 paper, with examiner-style notes mapping each response to the mark scheme and assessment objectives.

Question 1
WEC13/01 Section B, Q7(a) style — Calculate (2 marks, AO2)2 marks
[Easy · 2 marks · Section B(a)] A firm's total revenue rises from £120 when it sells 30 units to £132 when it sells 33 units. Calculate the marginal revenue over this range. Show your working.
Model answer
Marginal revenue = change in total revenue ÷ change in quantity (ΔTR ÷ ΔQ).

ΔTR = £132 − £120 = £12 (1).

ΔQ = 33 − 30 = 3 units, so MR = £12 ÷ 3 = £4 per unit (1).
Why this scores
2/2 (AO2): 1 mark for the method (ΔTR ÷ ΔQ, showing the £12 and 3-unit changes), 1 for the answer £4. Method marks are available even if the final arithmetic slips, so always show the two changes.
Question 2
WEC13/01 Section B, Q7(b) style — Explain what is meant by (4 marks, AO1/AO2)4 marks
[Easy · 4 marks · Section B(b)] Explain what is meant by 'average revenue'.
Model answer
Average revenue (AR) is the revenue a firm receives per unit of output sold (1). It is calculated as total revenue divided by quantity, AR = TR ÷ Q (1).

Because total revenue is price × quantity, the quantity cancels — so average revenue always equals the price, AR = (P × Q) ÷ Q = P (1). This is why the AR curve is the same as the firm's demand curve: it shows the price at each level of output (1).

For example, if a firm sells 200 units for a total revenue of £1,000, its average revenue is £1,000 ÷ 200 = £5, which is exactly the price.
Why this scores
4/4: revenue per unit (1); AR = TR ÷ Q (1); AR = P because Q cancels (1); therefore the AR curve is the demand curve, or a correct numerical example (1). The AR = P insight is the discriminating point examiners look for.
Question 3
WEC13/01 Section B, Q7(c) style — Analyse (6 marks), diagram expected, KAA Levels 1–36 marks
[Medium · 6 marks · Section B(c)] With the help of a diagram, analyse why the marginal revenue curve of a price-making firm lies below its average revenue curve.
Model answer
A price-maker is a firm with market power that faces a downward-sloping average revenue (demand) curve: to sell an extra unit it must lower the price.

The key point is that, to sell one more unit, the firm must charge the lower price on all the units it sells, not just the last one. So the extra unit brings in its (lower) price, but the firm loses a little revenue on every unit it was already selling. The net addition to revenue — the marginal revenue — is therefore less than the price (average revenue).

Because this lost-revenue effect grows as output rises, MR lies below AR at every positive quantity. For a straight-line AR curve the geometry is precise: MR starts at the same point on the price axis as AR (for the first unit almost nothing is lost), then falls twice as steeply, so it reaches zero at half the quantity at which AR meets the axis — the mid-point of AR.

On the diagram, the AR (demand) curve slopes gently downward from the price-intercept, while the MR curve starts at the same intercept and slopes down twice as fast, sitting clearly below AR throughout and cutting the horizontal axis at the mid-point of AR.
Why this scores
6/6 = KAA Level 3 (5–6): the lost-revenue chain (must cut price on ALL units → marginal unit adds less than its price → MR < AR) developed logically, plus a correctly drawn/described diagram (MR below AR, same price-intercept, twice as steep, cutting the axis at half AR's quantity-intercept). A bare assertion that 'MR is below AR' without the reasoning caps at Level 2. Diagram marks (AO2) are awarded separately.
Question 4
WEC13/01 Section B, Q7(d) style — Examine (8 marks), KAA Levels 1–38 marks
[Medium · 8 marks · Section B(d)] Examine the relationship between a firm's marginal revenue and the price elasticity of demand for its product.
Model answer
Marginal revenue (MR) is the extra revenue from selling one more unit (ΔTR ÷ ΔQ), and its sign is tied directly to the price elasticity of demand (PED) along the average revenue curve.

Along a straight-line AR (demand) curve, PED is not constant: demand is elastic near the top (high price, low quantity), unit-elastic at the mid-point, and inelastic near the bottom (low price, high quantity).

Elastic region — MR positive. When demand is elastic (|PED| > 1), a small price cut brings a more-than-proportionate rise in quantity, so the extra sales revenue outweighs the revenue lost on existing units. MR is therefore positive and total revenue is still rising.

Unit elasticity — MR zero. At the mid-point (|PED| = 1), the gain from the extra unit and the loss on existing units exactly cancel, so MR = 0 and total revenue is at its maximum.

Inelastic region — MR negative. When demand is inelastic (|PED| < 1), the price cut needed to sell one more unit reduces revenue on all units by more than the extra unit earns, so MR is negative and total revenue is falling.

The relationship can be written exactly as MR = P(1 − 1/|PED|): the bracket is positive when demand is elastic, zero at unit elasticity and negative when inelastic. This is why a revenue-maximising firm produces where MR = 0, at the unit-elastic point where demand switches from elastic to inelastic.
Why this scores
8/8 = KAA Level 3 (7–8): maps each elasticity region to the sign of MR with the underlying reasoning (extra-sales gain vs lost-revenue effect on existing units), links MR = 0 to the unit-elastic, revenue-maximising mid-point, and ideally quotes MR = P(1 − 1/|PED|). 'Examine' at Unit 3 is KAA-only, so the depth of the analytical chains lifts it to Level 3; a bare statement of the three cases without reasoning caps at Level 2.
Question 5
WEC13/01 Section B, Q7(e) style — Discuss (14 marks) = KAA (8) + Evaluation (6), diagram expected14 marks
[Hard · 14 marks · Section B(e)] Discuss the differences in the revenue curves faced by a price-taking firm and a price-making firm.
Model answer
A firm's revenue curves depend on the type of market it operates in — specifically, on whether it is a price-taker or a price-maker.

The price-taker. In perfect competition a firm is one of very many small sellers of an identical product, so it has no power over price — it must accept the market price. It can sell any quantity at that price but nothing above it, so it faces a horizontal, perfectly elastic demand curve (PED = ∞). Because the price is unchanged at every output, each extra unit adds exactly that price to revenue with nothing lost on earlier units, so AR = MR = price, all constant, on the same horizontal line. Total revenue therefore rises in a straight line from the origin: sell twice as much and TR doubles.

The price-maker. A firm with market power (e.g. a monopoly) faces a downward-sloping AR (demand) curve: to sell more it must cut the price on all units. So the marginal unit adds less than its price to revenue, and MR lies below AR and is twice as steep, reaching zero at the mid-point of AR. Total revenue is an inverted-U, rising while MR > 0, peaking where MR = 0, then falling as MR turns negative.

Evaluation. The size and importance of the difference depend on how much market power the firm has. In reality, few markets are perfectly competitive, so the horizontal AR = MR = P line is an extreme benchmark rather than a common case; most firms have at least some price-setting power and so face a (perhaps gently) downward-sloping AR. The steeper and less elastic the demand curve, the more market power the firm has and the further MR sits below AR — so the two cases are really the ends of a spectrum, not a rigid either/or.

The difference also matters for behaviour. A price-taker cannot raise revenue by changing price (it has none to set), whereas a price-maker must trade price against quantity and, if revenue-maximising, will produce where MR = 0. But even here the diagrams assume a single, uniform price; a price-maker that can price-discriminate faces different revenue curves again. Overall, the essential difference — horizontal AR = MR = P for a price-taker versus a downward-sloping AR with MR below it for a price-maker — is real and examinable, but its practical relevance depends on the degree of competition, which in most real markets lies somewhere between the two extremes.
Why this scores
KAA (8): accurately contrasts the two cases — perfectly elastic AR = MR = P and straight-line TR for the price-taker versus downward-sloping AR, MR below and twice as steep, and an inverted-U TR peaking at MR = 0 for the price-maker — supported by correct diagrams. Evaluation (6): recognises the two are ends of a market-power spectrum, that perfect competition is a rare benchmark, and that price discrimination changes the picture, reaching a judgement rather than a flat contrast. The 'spectrum / degree of market power' point is the discriminator that lifts Evaluation. Diagram marks (AO2) are awarded separately.
Question 6
WEC13/01 Section C style — Evaluate (20 marks), answer two of three, KAA 12 + Evaluation 820 marks
[Hard · 20 marks · Section C] Evaluate the view that a firm should always produce at the output where marginal revenue is zero.
Model answer
Producing where marginal revenue is zero is the output that maximises total revenue for a price-maker: while MR > 0 each extra unit adds to revenue, at MR = 0 total revenue peaks, and beyond it MR turns negative so revenue falls. The output where MR = 0 is the unit-elastic mid-point of the AR (demand) curve. Whether a firm should always produce there depends on what the firm is trying to achieve.

The case for producing where MR = 0. For a firm pursuing revenue maximisation, MR = 0 is exactly the right rule. Managers may target revenue (or sales) rather than profit because their pay, status or bonuses are tied to turnover and market share (the principal–agent problem), or because a larger sales base helps deter entry, build brand loyalty, or exploit economies of scale in the long run. A firm launching a product or fighting for market share may deliberately push output out to the revenue-maximising point. In these cases MR = 0 is a coherent and defensible objective.

The case against. The most important objection is that most firms aim to maximise profit, not revenue, and profit is maximised where MR = MC (marginal cost), not where MR = 0. Since marginal cost is normally positive, the profit-maximising output is lower than the revenue-maximising output — producing all the way to MR = 0 means selling extra units whose cost exceeds their (falling) revenue, which reduces profit and can even create a loss. A firm that ignores costs and simply maximises revenue may therefore end up worse off. Furthermore, the MR = 0 rule only bites for a price-maker: a price-taker in perfect competition faces a horizontal MR = price that is never zero, so the rule does not apply to it at all. Firms may also pursue other objectives — profit satisficing, survival, social or ethical goals, or long-run growth — none of which points to MR = 0.

Evaluation and judgement. Whether a firm should produce where MR = 0 depends entirely on its objective and its market. It is the correct rule if and only if the firm is a price-maker whose goal is to maximise revenue (or sales) in the short run. For the far more common goal of profit maximisation, the firm should instead produce where MR = MC, a smaller output; and for a price-taker the rule is meaningless. The claim that a firm should always produce where MR = 0 is therefore too strong: revenue maximisation is one legitimate objective among several, and confusing it with profit maximisation — the more usual assumption — would lead the firm to over-produce and sacrifice profit. The defensible conclusion is that MR = 0 is the right target only for a revenue-maximising price-maker, not a universal rule.
Why this scores
Top level on both strands. KAA (12): accurately explains why MR = 0 maximises revenue (TR rises while MR > 0, peaks at MR = 0), the reasons a firm might maximise revenue (managerial/agency motives, market share, entry deterrence), and the decisive contrast with profit maximisation at MR = MC — developed as multi-stage chains. Evaluation (8): challenges the word 'always' — profit-maximisers produce at MR = MC (a lower output), the rule is meaningless for a price-taker, and other objectives exist — reaching a conditional judgement (correct only for a revenue-maximising price-maker). The objective-and-market-dependent conclusion, and spotting that MR = 0 ≠ MR = MC, are the discriminators that push Evaluation to the top level.

Key Formulae — Revenue (Revenue Costs and Profits)

The formulae you need to memorise for revenue (revenue costs and profits) on the Pearson Edexcel IAL XEC11 / YEC11 paper, with every variable defined in plain English and a note on when to use it.

Total revenue (TR)
$TR = P \times Q$
$TR$
total revenue — the money received from sales
$P$
price per unit
$Q$
quantity sold
When to use
To find the total money a firm receives from selling a given quantity. The starting point for AR and MR calculations.
Example
P = £8, Q = 250 → TR = £8 × 250 = £2,000.
Average revenue (AR)
$AR = \frac{TR}{Q} = P$
$AR$
average revenue — revenue per unit sold
$TR$
total revenue
$Q$
quantity sold
When to use
To find revenue per unit. Because it always equals the price, the AR curve IS the firm's demand curve.
Example
TR = £2,000, Q = 250 → AR = £8 = the price.
Marginal revenue (MR)
$MR = \frac{\Delta TR}{\Delta Q}$
$MR$
marginal revenue — the extra revenue from one more unit
$\Delta TR$
change in total revenue
$\Delta Q$
change in quantity (usually one unit)
When to use
To find the revenue added by selling one more unit. MR = P for a price-taker; MR < P (below AR) for a price-maker. TR is maximised where MR = 0.
Example
TR rises £48 → £55 as Q rises 4 → 5: MR = 7 ÷ 1 = £7.
MR and PED link (A* extension)
$MR = P\left(1 - \frac{1}{\lvert PED\rvert}\right)$
$MR$
marginal revenue
$P$
price (= average revenue)
$\lvert PED\rvert$
the size of price elasticity of demand
When to use
To connect the sign of MR to elasticity: |PED| > 1 (elastic) → MR > 0; |PED| = 1 → MR = 0; |PED| < 1 (inelastic) → MR < 0.
Example
P = £10, |PED| = 2 → MR = 10 × (1 − ½) = £5 (positive, elastic region).
Profit (to distinguish from revenue)
$\text{Profit} = TR - TC$
$TR$
total revenue (money in)
$TC$
total cost
When to use
To remember that revenue is NOT profit. Revenue is the money coming in; profit is what is left after total cost is deducted.
Example
TR = £2,000, TC = £1,500 → profit = £500.

Key Definitions and Keywords — Revenue (Revenue Costs and Profits)

Definitions to memorise and the exact keywords mark schemes credit for revenue (revenue costs and profits) answers — sharpened from recent examiner reports for the 2026 Pearson Edexcel IAL XEC11 / YEC11 sitting.

Total revenue (TR)
Examiner keyword
The total money a firm receives from selling its output: price × quantity (TR = P × Q).
Average revenue (AR)
Examiner keyword
Revenue per unit sold: TR ÷ Q. It always equals the price (AR = P), so the AR curve is the firm's demand curve.
Marginal revenue (MR)
Examiner keyword
The extra revenue gained from selling one more unit of output: the change in total revenue divided by the change in quantity (ΔTR ÷ ΔQ).
Price-taker
Examiner keyword
A firm with no power to set its own price that must accept the market price (as in perfect competition); it faces a horizontal, perfectly elastic demand curve, so AR = MR = price.
Price-maker
Examiner keyword
A firm with market power that can influence its own price (e.g. a monopoly); it faces a downward-sloping AR (demand) curve, so it must lower price to sell more and MR lies below AR.
Perfectly elastic demand
Examiner keyword
Demand where PED is infinite — a horizontal demand curve. Any rise in price causes quantity demanded to fall to zero; this is the demand curve faced by a price-taker.
AR curve (demand curve)
The average revenue curve, which shows price at each quantity; because AR = P, it is identical to the firm's demand curve.
Revenue maximisation
Examiner keyword
Producing the output at which total revenue is greatest — the output where marginal revenue is zero (MR = 0), the unit-elastic mid-point of the AR curve.
Unit (unitary) elasticity
Where |PED| = 1 — quantity demanded changes by the same proportion as price; at this point MR = 0 and total revenue is at its maximum.
Profit
Examiner keyword
The surplus of total revenue over total cost (profit = TR − TC). Profit is distinct from revenue, which is the money received before costs are deducted.

Common Mistakes and Misconceptions — Revenue (Revenue Costs and Profits)

The traps other students keep falling into on revenue (revenue costs and profits) questions — taken from recent Pearson Edexcel IAL XEC11 / YEC11 examiner reports and mark schemes — and how to avoid them.

✕Not recognising that average revenue equals price (AR = P)
WEC13 Examiner Reports
Why it happens
Students treat AR as a separate mysterious quantity rather than seeing the Q cancel in TR ÷ Q.
How to avoid it
Show the algebra: AR = TR ÷ Q = (P × Q) ÷ Q = P. Average revenue ALWAYS equals price, which is why the AR curve is the demand curve.
✕Drawing MR equal to (or on top of) AR for a price-maker
WEC13 Examiner Reports — recurring diagram error
Why it happens
Students carry over the price-taker result (AR = MR) to a firm with a downward-sloping demand curve.
How to avoid it
MR = AR ONLY for a price-taker (horizontal demand). For a price-maker, MR is BELOW AR, shares AR's price-intercept and is TWICE as steep, cutting the axis at half AR's quantity-intercept.
✕Assuming AR = MR = price in every market
Why it happens
The neat horizontal AR = MR = P line is memorised without noting it applies only under perfect competition.
How to avoid it
AR = MR = price holds ONLY for a price-taker (perfect competition), where demand is perfectly elastic. Any firm with market power faces a downward-sloping AR and MR below it.
✕Thinking total revenue is maximised at the highest price
WEC13 Examiner Reports
Why it happens
It feels intuitive that charging more always brings in more money.
How to avoid it
TR is maximised where MR = 0 (the unit-elastic mid-point of AR), NOT at the highest price. Above that price demand is elastic, so cutting price actually raises TR.
✕Confusing revenue with profit
WEC13 Examiner Reports
Why it happens
Both are money figures, so students use them interchangeably.
How to avoid it
Revenue = money coming IN (TR = P × Q). Profit = TR − TC (what is left after costs). A high revenue can still be a loss. Answer 'revenue' questions about revenue only.
✕Getting the MR–elasticity link the wrong way round
Why it happens
Students remember MR and PED are linked but reverse which region gives positive MR.
How to avoid it
MR is POSITIVE where demand is ELASTIC (top of AR), ZERO at unit elasticity (mid-point), and NEGATIVE where demand is INELASTIC (bottom). Check with MR = P(1 − 1/|PED|).