Costs, Revenues & Profit (Edexcel IGCSE Economics)

Different Types of Costs

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

Fixed costs (FC)

• These 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

Variable costs (VC)

• These 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)

• These are the sum of the fixed + total variable costs 

Cost calculations and cost graphs

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

Example calculations using a variable cost of $60 per unit

A Graphical Representation of Costs

Types of Costs

Type of Cost	Diagram	Explanation
Fixed cost (FC)		The firm has to pay its fixed costs, which do not change, irrespective of whether 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 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 zero, as all firms have some level of fixed costs, even if they produce zero output
Average total cost (AC)		As a firm grows, it is able to increase 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 to increase 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 average costs are called diseconomies of scale

Revenue

• Total revenue is the total value of all sales a firm generates

• Average revenue is the overall revenue per unit. Average revenue is the technical economic name for "price"

Revenue Calculation Example

• 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 such as pensioners or children)

• The value in the AR column is identical to the value in the P column

Profit

• Profit = total revenue (TR) - total costs (TC)

• Breakeven occurs when TR = TC  This is the point at which the firm has generated enough revenue to cover all of its costs

  • No loss is made, but no profit is generated yet either

• Profit occurs when TR > TC

• A loss occurs when TR < TC

Profit Calculation Example