Calculate costs and revenue, then compare firm objectives
Use total and average cost and revenue measures to explain business decisions and objectives.
Cambridge IGCSE Economics 0455 / IGCSE (9–1) Economics 0987, 2027–2029 Version 1. Apply each model to the stated evidence and qualify conclusions where effects depend on context. Practice is original and self-checked; it is not a Cambridge paper, mark scheme or official grade.
Before you begin
- No prior economics study is assumed. Read the scenario for the decision-maker, the market or economy involved, the time period and the evidence supplied.
Work on paper. Try each question before revealing help, and explain why your method works.
Quick readiness check
Which formula gives average total cost?
What you will learn
- Define and calculate costs
- Calculate total and average revenue
- Compare survival, welfare, profit and growth objectives
Separate total from average measures
Total fixed cost does not vary with output in the short run; total variable cost changes with output. Total cost is fixed plus variable cost. Average measures divide the relevant total by output.
Average total cost = total cost ÷ output. Average fixed cost = fixed cost ÷ output; average variable cost = variable cost ÷ output. A cost diagram can show how output changes affect these values.
Revenue and objectives are distinct
Total revenue equals price multiplied by quantity sold; average revenue equals total revenue divided by quantity. Higher sales can raise revenue, but profit also depends on costs.
Firms may aim for survival, social welfare, profit maximisation or growth. Objectives can differ and change over time; explain the stated objective instead of assuming every firm only maximises profit.
Pause and explain
A firm reports revenue of $20,000 and costs of $17,000. What is its profit before any other stated items?
Worked example
A firm produces 100 units with fixed costs $400 and variable costs $600. Find total cost and average total cost.
Show the worked solution
- Total cost = 400 + 600.
- Total cost is $1,000.
- Average total cost = 1,000 ÷ 100 = $10.
Answer Total cost is $1,000 and average total cost is $10 per unit.
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Test this topic →From guided practice to a new situation
Write your answer and reasoning first. Use a hint only if you are stuck. The model solution is for self-checking; your written work is not automatically marked.
A workshop has fixed costs $300 and variable costs $700 at 200 units. Calculate total cost and average total cost.
Give me a hint
Add fixed and variable cost, then divide by output.
Compare my reasoning
- Total cost = 300 + 700 = $1,000.
- Average total cost = 1,000 ÷ 200.
- Report the per-unit amount.
Total cost is $1,000 and average total cost is $5 per unit.
Look for these in your work
- Total cost correct
- Division correct
- Unit stated
A seller's price falls from $12 to $10 while sales rise from 100 to 130 units. Calculate revenue in each case and compare.
Give me a hint
Compute price × quantity for both periods.
Compare my reasoning
- Before: 12 × 100 = $1,200.
- After: 10 × 130 = $1,300.
- Revenue rises by $100, though costs are unknown.
Revenue rises from $1,200 to $1,300. The figures do not show whether profit rose because costs may have changed.
Look for these in your work
- Initial revenue correct
- New revenue correct
- Profit distinction stated
A social enterprise must choose between expanding quickly and maintaining service access in an unprofitable area. Explain why its objectives may conflict.
Give me a hint
Compare growth with welfare and resource constraints.
Compare my reasoning
- Expansion may increase reach or scale.
- Maintaining a costly service can support social welfare.
- Finance and long-run survival constrain both choices.
Growth could extend services, while retaining an unprofitable area may protect access. The enterprise must weigh welfare and expansion against financial sustainability and its available resources.
Look for these in your work
- Objectives identified
- Conflict explained
- Constraint considered
Common mistakes
- Adding average cost to total cost
- Calling revenue profit
- Assuming a social enterprise has no financial constraints
What can you explain now?
How is total cost calculated from fixed and variable costs?
Compare with the explanation
Fixed cost plus variable cost
The two components make up total cost.
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Make it stick
How is total cost calculated from fixed and variable costs?
If you needed the solution, close it and solve the problem again from a blank page. A correct answer is stronger when you can explain the reason for each step.