Firms’ costs, revenues and objectives | O Level Economics 2281 & IGCSE Economics 0455 | Detailed Free Notes To Score An A Star (A*)
3.7.1 Definition of Costs of Production
- Costs of production refer to the expenses incurred by a firm when producing goods or services.
- These include both fixed and variable costs.
3.7.2 Calculation of Costs of Production
Key Cost Terms and Definitions:
| Cost Type | Formula | Description |
|---|---|---|
| Fixed Cost (FC) | – | Cost that does not change with output (e.g., rent, salaries). |
| Variable Cost (VC) | – | Cost that changes with output (e.g., raw materials, wages). |
| Total Cost (TC) | FC + VC | All costs combined at each level of output. |
| Average Total Cost (ATC) | TC / Q | Cost per unit of output. |
| Average Fixed Cost (AFC) | FC / Q | Fixed cost per unit. |
| Average Variable Cost (AVC) | VC / Q | Variable cost per unit. |
Note: Marginal cost (MC) is not required in this syllabus.
Worked Example
| Output (Q) | FC ($) | VC ($) | TC = FC + VC | AFC = FC/Q | AVC = VC/Q | ATC = TC/Q |
|---|---|---|---|---|---|---|
| 1 | 100 | 50 | 150 | 100.0 | 50.0 | 150.0 |
| 2 | 100 | 90 | 190 | 50.0 | 45.0 | 95.0 |
| 3 | 100 | 120 | 220 | 33.3 | 40.0 | 73.3 |
Diagrammatic Representation of Costs
- X-axis: Output (Q), Y-axis: Cost ($)
- Curves to draw:
- ATC (U-shaped): First falls due to spreading FC, then rises due to rising AVC.
- AFC (declining): Always slopes down.
- AVC: U-shaped, like ATC but lower.
3.7.3 Definition of Revenue
- Revenue is the income a firm earns from selling goods or services.
- Related directly to sales volume and price.
3.7.4 Calculation of Revenue
| Revenue Type | Formula | Description |
|---|---|---|
| Total Revenue (TR) | Price × Quantity (P × Q) | Total money earned from sales. |
| Average Revenue (AR) | TR / Q | Revenue per unit sold. |
In perfect competition: AR = Price
Worked Example
| Quantity Sold (Q) | Price per Unit ($) | TR = P × Q | AR = TR/Q |
|---|---|---|---|
| 1 | 50 | 50 | 50.0 |
| 2 | 50 | 100 | 50.0 |
| 3 | 50 | 150 | 50.0 |
- If price falls with higher quantity, AR also decreases.
- In monopoly or imperfect markets, AR curve slopes downwards.
Diagram of Revenue
- X-axis: Output
- Y-axis: Revenue
- AR and TR curves:
- AR: Horizontal (in perfect competition) or downward-sloping.
- TR: Upward-sloping curve (eventually flattens or declines in imperfect markets).
3.7.5 Objectives of Firms
| Objective | Explanation |
|---|---|
| Profit Maximisation | Most common goal. Achieved when difference between TR and TC is largest. |
| Survival | Especially for new or struggling firms in competitive markets. Focus on breaking even. |
| Growth | Increase market share, output, or geographical reach. May reinvest profits to expand. |
| Social Welfare | Some firms (especially public or social enterprises) aim to benefit society (e.g., environment, fair trade). |
Objective Choice Depends On:
- Firm size and age
- Market competition
- Ownership type (private vs public)
- Regulations and government objectives
- Corporate social responsibility
Summary Table: Key Formulae
| Term | Formula |
|---|---|
| TC | FC + VC |
| ATC | TC / Q |
| AFC | FC / Q |
| AVC | VC / Q |
| TR | Price × Quantity |
| AR | TR / Q |
Exam Tip
- Show step-by-step calculations.
- Use correctly labelled cost curves.
- Link revenue and output: highlight how price changes affect TR.
- Clearly distinguish objectives and relate them to firm type or market conditions.
