Costs & Revenue (Cambridge International IGCSE Economics)

Exam board Cambridge International · IGCSEUpdated 2025-06-30

Different Types of Costs

Spec point — 3.7.1 · Total cost (TC), average total cost (ATC), fixed cost (FC), variable cost (VC), average fixed cost (AFC), average variable cost (AVC). Note: marginal cost is not required. Definition, drawing and interpretation of diagrams that show how changes in output affect costs of production.

In preparing goods/services for sale, firms incur a range of costs. These costs can be be broken into different categories

Fixed costs (FC) are costs that do not change as the level of output changes

These have to be paid whether output is zero or 5000
- E.g. Building rent, management salaries, insurance, bank loan repayments etc.

Variable costs (VC) are costs that vary directly with output

These increase as output increases and vice versa
- E.g. raw material costs, wages of workers directly involved in production

Total costs (TC) are the sum of the fixed + total variable costs

Cost Calculations

Spec point — 3.7.1 · Calculation of TC, ATC, FC, VC, AFC and AVC.

Based on the above definitions, we can calculate several different types of costs

$\mathrm{Total} \mathrm{costs}(\mathrm{TC})=\mathrm{total} \mathrm{fixed} \mathrm{costs}(\mathrm{TFC})+\mathrm{total} \mathrm{variable} \mathrm{costs}(\mathrm{TVC})$
$\mathrm{Total} \mathrm{variable} \mathrm{cost}(\mathrm{TVC})=\mathrm{variable} \mathrm{cost}(\mathrm{VC})\times\mathrm{quantity}(Q)$
$\mathrm{Average} \mathrm{total} \mathrm{cost}(\mathrm{AC})=\frac{\mathrm{total} \mathrm{cost}(\mathrm{TC})}{\mathrm{quantity}(Q)}$
$\mathrm{Average} \mathrm{fixed} \mathrm{cost}(\mathrm{AFC})=\frac{\mathrm{Total} \mathrm{fixed} \mathrm{costs}(\mathrm{TFC})}{\mathrm{quantity}(Q)}$
$\mathrm{Average} \mathrm{variable} \mathrm{cost}(\mathrm{AVC})=\frac{\mathrm{Total} \mathrm{variable} \mathrm{costs}(\mathrm{TVC})}{\mathrm{quantity}(Q)}$
Cost Calculations Using the Above Formulas Where VC Is $60

Output (Q)	TFC	TVC = $\$ 60 \mathrm{x} \mathrm{Q}$	TC = $\mathrm{TFC}+\mathrm{TVC}$	AFC = $\frac{\mathrm{TFC}}{Q}$	AVC = $\frac{\mathrm{TVC}}{Q}$	AC = $\frac{\mathrm{TC}}{Q}$
0	200	-	200	-	-	-
1	200	60	260	200	60	260
2	200	120	320	100	60	160
3	200	180	380	66.67	60	126.67
4	200	240	440	50	60	110
5	200	300	500	40	60	100
6	200	360	560	33.34	60	93.33
7	200	420	620	28.58	60	88.57
8	200	480	680	25	60	85

Diagrammatic Representation of Costs

Spec point — 3.7.1 · Diagrammatic Representation Of Costs

Sketches Which Represent the Different Costs of a Firm

Type of Cost	Diagram	Explanation
Fixed Cost (FC)		- The firm has to pay its fixed costs which do not change, irrespective if the output is 0 or 100,000 units - The fixed costs for this firm are $4,000
Variable Cost (VC)		- The variable costs initially rise proportionally with output, as shown in the diagram - At some point the firm will benefit from a purchasing economy of scale and the rise will no longer be proportional
Total Cost (TC)		- The total cost is the sum of the variable and fixed costs - The total costs cannot be 0 as all firms have some level of fixed costs
Average Fixed Cost (AFC)		- If the fixed costs of a firm are $1,000 and it produces 1 unit of output, then its AFC is $1,000 ($1,000/1) - If the firm increases its output to 1000 units, then the AFC is $1 per unit ($1000/1,000) - The more units a firm produces, the lower its AFC will be - This is one reasons why large levels of output help to increase the profit per unit
Average Total Cost (AC)		- As a firm grows, it is able to increases its scale of output generating efficiencies that lower its average total costs (AC) of production - These efficiencies are called economies of scale - As a firm continues increasing its scale of output, it will reach a point where its average total costs (AC) will start to increase - The reasons for the increase in the average costs are called diseconomies of scale

Exam Hint MCQ frequently tests your knowledge of these curves by presenting you with 4 unlabelled diagrams and, for example, asking you to identify which sketch demonstrates the average fixed costs of the firm.

Different Types of Revenue

Spec point — 3.7.1 · Total revenue (TR) and average revenue (AR). Note: marginal revenue is not required. Calculation of TR and AR. The influence of sales on revenue.

Total revenue is the total value of all sales a firm incurs

$\mathrm{Total} \mathrm{revenue}(\mathrm{TR})=\mathrm{selling} \mathrm{price}(P)\times\mathrm{quantity} \mathrm{sold}(Q)$

Average revenue is the overall revenue per unit

$\mathrm{Average} \mathrm{revenue}(\mathrm{AR})=\frac{\mathrm{TR}}{Q}$

An Example of Revenue Calculations

P ($)	Q	TR $(P\times Q)$	AR $\frac{\mathrm{TR}}{Q}$
8	1	8	8
7	2	14	7
6	3	18	6
5	4	20	5
4	5	20	4
3	6	18	3
2	7	14	2
1	8	8	1

Average revenue information is especially useful to a firm selling multiple products (e.g. supermarkets) or a firm that sells the same item at different prices (e.g. rail tickets are usually priced differently for different types of commuters e.g. pensioners)

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Exam QuestionsFirms’ costs, revenue and objectives FlashcardsFirms’ costs, revenue and objectives

Output (Q)

TFC

TVC =

\

60 \mathrm{x} \mathrm{Q}$

TC =

\mathrm{TFC}+\mathrm{TVC}

AFC =

\frac{\mathrm{TFC}}{Q}

AVC =

\frac{\mathrm{TVC}}{Q}

AC =

\frac{\mathrm{TC}}{Q}

200

260

200

260

200

120

320

100

160

200

180

380

66.67

126.67

200

240

440

110

200

300

500

100

200

360

560

33.34

93.33

200

420

620

28.58

88.57

200

480

680

Type of Cost

Diagram

Explanation

Fixed Cost (FC)

Graph showing fixed costs as a horizontal line at $4000 with cost on the vertical axis and output level on the horizontal axis.

- The firm has to pay its fixed costs which do not change, irrespective if the output is 0 or 100,000 units
- The fixed costs for this firm are $4,000

Variable Cost (VC)

Graph showing the relationship between total variable costs and output level with a red upward-sloping line, labelled axes in dollars and output.

- The variable costs initially rise proportionally with output, as shown in the diagram
- At some point the firm will benefit from a purchasing economy of scale and the rise will no longer be proportional

Total Cost (TC)

Graph showing costs versus output level with three lines: fixed cost (horizontal), variable cost (diagonal), and total cost (steeper diagonal).

- The total cost is the sum of the variable and fixed costs
- The total costs cannot be 0 as all firms have some level of fixed costs

Average Fixed Cost (AFC)

Graph showing average fixed cost curve, downward sloping from left to right. Y-axis is labelled "Costs ($)" and X-axis "Output Level".

- If the fixed costs of a firm are $1,000 and it produces 1 unit of output, then its AFC is $1,000 ($1,000/1)
- If the firm increases its output to 1000 units, then the **AFC is $1 per unit **($1000/1,000)
- The more units a firm produces, the lower its AFC will be
- This is one reasons why large levels of output help to increase the profit per unit

Average Total Cost (AC)

Graph showing average total cost curve, costs on vertical axis, output level on horizontal axis. Curve dips from point a and rises after point b.

- As a firm grows, it is able to increases its scale of output generating efficiencies that lower its average total costs (AC) of production
- These efficiencies are called economies of scale
- As a firm continues increasing its scale of output, it will reach a point where its average total costs (AC) will start to increase
- The reasons for the increase in the average costs are called diseconomies of scale

P ($)

**TR **

(P\times Q)

**AR **

\frac{\mathrm{TR}}{Q}