Costs & Revenue (Cambridge (CIE) O Level Economics)
Revision Note
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) 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
Based on the above definitions, we can calculate several different types of costs
Cost Calculations Using the Above Formulas Where VC Is $60
Output (Q) | TFC | TVC = | TC = | AFC = | AVC = | AC = |
---|---|---|---|---|---|---|
0 | 200 | - | 200 | - | - | - |
1 | 200 | 60 | 260 | 200 | 60 | 260 |
2 | 200 | 120 | 320 | 100 | 60 | 160 |
3 | 200 | 180 | 380 | 66.67 | 60 | 126.67 |
4 | 200 | 240 | 440 | 50 | 60 | 110 |
5 | 200 | 300 | 500 | 40 | 60 | 100 |
6 | 200 | 360 | 560 | 33.34 | 60 | 93.33 |
7 | 200 | 420 | 620 | 28.58 | 60 | 88.57 |
8 | 200 | 480 | 680 | 25 | 60 | 85 |
Diagrammatic Representation of Costs
Sketches Which Represent the Different Costs of a Firm
Type of Cost | Diagram | Explanation |
---|---|---|
Fixed Cost (FC) |
| |
Variable Cost (VC) |
| |
Total Cost (TC) |
| |
Average Fixed Cost (AFC) |
| |
Average Total Cost (AC) |
|
Examiner Tip
MCQ frequently tests your knowledge of these curves by presenting you with 4 unlabelled diagrams and, for example, asking you to identify which sketch demonstrates the average fixed costs of the firm.
Different Types of Revenue
Total revenue is the total value of all sales a firm incurs
Average revenue is the overall revenue per unit
An Example of Revenue Calculations
P ($) | Q | TR | AR |
---|---|---|---|
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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