A Level Economics AQA Practice Exam

How is profit defined in economic terms?

1. Total revenue minus total costs

2. Total sales minus fixed costs

3. Total income minus variable costs

4. Total turnover minus operational costs

The correct answer is: Total revenue minus total costs

Profit in economic terms is defined as total revenue minus total costs. This definition encompasses all forms of costs incurred by a business, both fixed and variable. When assessing profitability, it is crucial to consider the difference between what a firm earns (total revenue) from selling goods or services and what it spends (total costs) to produce those goods or services. Total revenue is calculated by multiplying the price of goods or services sold by the quantity sold, while total costs include fixed costs, which do not change with the level of output, and variable costs, which fluctuate with production levels. Therefore, the ability to determine profit indicates a comprehensive overview of a company's financial health and operational efficiency. Other options do not adequately capture the complete picture of profit. For instance, subtracting only fixed costs from total sales or total income from only variable costs does not reflect the full cost structure of a business. Similarly, using total turnover minus operational costs fails to take into account all elements of production and expenses, ultimately missing important aspects that contribute to the total profit calculation.