Objectives of Firms / Cost and Revenue
H2 Economics - syllabus 9570, 2026
Explain how firms' costs and revenues change with output, how they choose output and price, and why they may pursue goals other than profit.
- Revenue, cost and profit
Profit is total revenue minus total cost, and economists count opportunity cost as a cost.
- Short run and long run
In the short run at least one input is fixed; in the long run every input can change.
- Fixed, variable and total cost
Fixed costs do not change with output; variable costs do; total cost is the two added together.
- Average and marginal cost
Average cost is cost per unit; marginal cost is the cost of one more unit, and MC cuts AC at its lowest point.
- Total, average and marginal revenue
AR is the price. MR, the revenue from one more unit, is below the price when the firm must cut prices to sell more.
- When costs change
A rise in fixed cost lowers profit but does not change the best output; a rise in variable cost does.
- Profit maximisation: MR = MC
A firm maximises profit by producing where MR = MC, then charging the price on its demand curve.
- Other objectives firms may pursue
Not every firm maximises profit: some maximise revenue, some settle for a satisfactory profit, some chase market share.
- Decisions with imperfect information
Firms rarely know their exact MR and MC, so they use estimates and rules of thumb.
- Internal economies and diseconomies of scale
As a firm grows, its long-run average cost first falls (economies of scale), then may rise (diseconomies).
- External economies and diseconomies of scale
External economies come from the growth of the whole industry, and shift every firm's LRAC down.
- Should the firm expand?
Expand only if the extra revenue is likely to exceed the extra cost, allowing for the risk that demand disappoints.
- Model essay (a): when a firm's costs rise
A top 10-mark answer, written in about 20 minutes, separates fixed from variable costs: only a change in marginal cost moves the profit-maximising price and output.
- Model essay (b): should firms always maximise profit?
A top 15-mark answer, written in about 30 minutes, weighs profit against other objectives, and judges by market structure, time frame and who owns the firm.
- Case study practice: a bakery chain under pressure
A whole H2 case study: 30 marks, about 75 minutes in the exam. Answer every part, then compare with the suggested answers.
What you will be able to do
I can explain profit as total revenue minus total cost and find the profit-maximising output where MR equals MC with MC rising.
Syllabus 9570, 2.2.1(a). Objectives of Firms: Firms aim to maximise profits; Profit as the difference between total revenue and total cost; Profit-maximising output occurs at the point when marginal revenue (MR) equals marginal cost (MC) and where MC is rising
Taught in Revenue, cost and profit, Profit maximisation: MR = MC, Decisions with imperfect information, Model essay (a): when a firm's costs rise, Model essay (b): should firms always maximise profit?, Case study practice: a bakery chain under pressure
I can describe other goals a firm may chase: more revenue, enough profit (satisficing) or a bigger market share.
Syllabus 9570, 2.2.1(b). Objectives of Firms: Firms may choose to pursue alternative objectives such as revenue maximisation, profit satisficing and market share dominance
Taught in Other objectives firms may pursue, Model essay (b): should firms always maximise profit?
I can explain a firm's cost and revenue concepts in the short run and the long run.
Syllabus 9570, 2.2.2(a). Cost and Revenue: Firms' cost and revenue concepts in the short run and long run
Taught in Short run and long run, Fixed, variable and total cost, Average and marginal cost, Total, average and marginal revenue, When costs change, Model essay (a): when a firm's costs rise, Case study practice: a bakery chain under pressure
I can explain internal and external economies and diseconomies of scale and link them to long-run average cost.
Syllabus 9570, 2.2.2(b). Cost and Revenue: Internal and external economies and diseconomies of scale and their link to the long run average cost of production
Taught in Internal economies and diseconomies of scale, External economies and diseconomies of scale, Case study practice: a bakery chain under pressure
I can explain the strategies firms use to raise revenue or cut unit costs: growth, pricing, price discrimination, innovation, marketing and collusion.
Syllabus 9570, 2.2.3(a). Firms' Decisions and Strategies: Firms make decisions and engage in pricing, cost and product differentiation strategies aimed at raising revenue and/or lowering unit costs. These include:; growth, diversification and shut-down; price competition; third degree price discrimination; innovation, research and development; marketing; collusion with other firms
Taught in Should the firm expand?
Original teaching notes