Cambridge A Level Economics: Long-run costs, economies of scale, revenue, profit (9708) – Revision Notes

These notes condense statements 7.5.3 to 7.5.10 of the Cambridge International AS & A Level Economics syllabus for examination in 2026, 2027 and 2028. This is topic 7, so it is A Level content only and is not examined at AS. For full explanations and longer worked examples, read the study guide, then test yourself with the practice questions. The course hub and checklist show the rest of the syllabus, and a free 10-minute diagnostic shows what to revise first. All figures here are invented and money is in currency units (cu).

Key definitions

Term	Meaning
Long run	Period in which all factors of production can be varied; no fixed factors
Returns to scale	Change in output when all inputs rise in the same proportion
Increasing returns	Output rises by a bigger percentage than inputs
Constant returns	Output rises by the same percentage as inputs
Decreasing returns	Output rises by a smaller percentage than inputs
LRAC	Lowest average cost of each output level when the firm can choose any scale
Minimum efficient scale	Lowest output at which LRAC is at its minimum
Economies of scale	LRAC falls as output rises
Diseconomies of scale	LRAC rises as output rises
Total revenue (TR)	Price × quantity sold
Average revenue (AR)	TR/quantity, equal to price
Marginal revenue (MR)	Extra revenue gained from selling one additional unit
Normal profit	Minimum reward needed to keep the entrepreneur in the industry, treated as a cost
Supernormal profit	Profit above normal profit: TR > TC, AR > ATC
Subnormal profit	Profit below normal profit: TR < TC, AR < ATC

Returns to scale (7.5.3)

Method in steps:

1. Work out the percentage change in inputs: (new − old)/old × 100.
2. Work out the percentage change in output the same way.
3. Compare. Output change bigger means increasing returns, equal means constant, smaller means decreasing.
4. If asked for cost, divide long-run total cost by output. With constant input prices, increasing returns mean falling LRAC.

Worked reminder: a workshop raises all inputs by 60% and output rises from 200 to 380 units. Output rises (380 − 200)/200 × 100 = 90%. 90 > 60, so returns are increasing. The ratio of output change to input change is 90/60 = 1.5.

A second case: inputs +40% and output +28%. The ratio is 28/40 = 0.7, which is below 1, so returns are decreasing.

Must-know distinction:

Returns to scale	Diminishing returns
Long run	Short run
All factors change together	At least one factor fixed
Explains LRAC shape	Explains rising short-run marginal cost

LRAC and minimum efficient scale (7.5.4)

• The LRAC is drawn as a U-shape (or sometimes an L-shape). It is the envelope of short-run average cost curves, one for each scale of plant.
• The falling section reflects economies of scale. A flat section means constant returns. A rising section reflects diseconomies.
• MES is the first output at which the minimum is reached.
• The size of MES relative to the market limits how many firms can reach it. Number of firms at MES = market demand/MES, rounded down.

Worked reminder: a mill has LRAC of 5.0, 4.2, 3.9, 3.9 and 4.3 cu at 100, 200, 300, 400 and 500 units. The minimum is 3.9 cu, first reached at 300, so MES is 300 units. The fall between 100 and 300 is (3.9 − 5.0)/5.0 × 100 = −22.0%. If the market buys 1,000 units at this price, at most 1,000/300 = 3.33, so 3 firms, can reach MES.

Economies and diseconomies of scale (7.5.5 to 7.5.7)

	Internal (firm grows)	External (industry grows)
Economies	Technical, purchasing, managerial, financial, marketing, risk-bearing	Skilled labour pool, specialist suppliers, training colleges, shared transport and research
Diseconomies	Communication, coordination and control problems, low motivation, duplication	Congestion, higher rents and wages, strained local infrastructure
On the diagram	Movement along the LRAC	Shift of the LRAC (down for economies, up for diseconomies)

Worked reminders:

• Moving from 8.50 cu to 6.80 cu per unit is a fall of (6.80 − 8.50)/8.50 × 100 = −20.0%.
• A fixed distribution cost of 30,000 cu spread over 10,000 units is 3.00 cu each. Over 25,000 units it is 1.20 cu each.
• If an industry cluster cuts every firm’s costs by 5%, a point at 4.40 cu moves to 4.40 × 0.95 = 4.18 cu. That is a shift.

Chain of reasoning for a developed explanation: firm expands, so spreads a fixed cost or buys in bulk, so cost per unit falls, so LRAC falls and the firm moves down its curve. Close by naming the factor, the mechanism and the effect on average, not total, cost.

Evaluation points:

• Whether consumers gain depends on competition: a firm with market power may keep the saving as profit.
• Benefits are limited once MES is passed.
• Diseconomies can be delayed by delegation and better systems.
• External economies depend on the industry staying concentrated in one area.

Revenue (7.5.8)

Formula	Result
TR	P × Q
AR	TR/Q = P
MR	change in TR/change in Q

• Price taker: AR = MR = price, and the demand curve is horizontal.
• Price maker facing a downward-sloping demand curve: MR is below AR, because a lower price applies to every unit sold.
• For a straight-line demand curve P = a − bQ, TR = aQ − bQ² and MR = a − 2bQ. MR has the same intercept and twice the slope.

Worked example: demand is P = 30 − 3Q.

Q	P = AR	TR	MR
1	27	27	27
2	24	48	21
3	21	63	15
4	18	72	9
5	15	75	3
6	12	72	−3

MR for the fourth unit is 72 − 63 = 9. The formula MR = 30 − 6Q gives 30 − 21 = 9 at Q = 3.5, which matches. TR is largest at 5 units, where MR is closest to zero. MR is zero at Q = 5 on the formula, which is where price elasticity of demand equals −1.

Price taker reminder: at a constant price of 5.50 cu, selling 200 units gives TR of 1,100 cu and 260 units gives 1,430 cu. MR = (1,430 − 1,100)/60 = 5.50 cu = AR.

Profit (7.5.9 and 7.5.10)

Case	TR against TC	AR against ATC
Normal profit	equal	equal
Supernormal profit	TR > TC	AR > ATC
Subnormal profit	TR < TC	AR < ATC

Method in steps:

1. Find TR = AR × Q.
2. Find TC = ATC × Q. Make sure TC includes normal profit.
3. Profit = TR − TC, or (AR − ATC) × Q.
4. Positive means supernormal, zero means normal, negative means subnormal.

Worked reminders:

• AR 7.40, ATC 6.85, output 1,200: (7.40 − 6.85) × 1,200 = 660 cu supernormal.
• TR 31,000, TC 33,500: 31,000 − 33,500 = −2,500 cu, so subnormal profit.
• If accounting profit is 14,000 cu and the owner’s next-best earnings are 11,000 cu, supernormal profit is 3,000 cu. If next-best earnings were 16,000 cu, profit would be subnormal by 2,000 cu even though the accounts show a gain.

Quick self-test

1. Define returns to scale.
2. Inputs rise 40% and output rises 28%. State the returns to scale.
3. Is a fall in LRAC caused by cheaper bulk purchasing a movement along or a shift of the curve?
4. Average cost falls from 12.50 cu to 10.00 cu. Calculate the percentage change.
5. A firm sells 250 units at a price of 18 cu. Calculate TR.
6. Selling 260 units needs a price of 17.70 cu. Calculate the MR of the extra 10 units, given the answer to question 5.
7. AR is 7.40 cu, ATC is 6.85 cu and output is 1,200. Calculate supernormal profit.
8. TR is 31,000 cu and TC is 33,500 cu. State the type of profit and its size.
9. LRAC is 5.0, 4.2, 3.9, 3.9 and 4.3 cu at outputs of 100 to 500. State MES.
10. Give two external diseconomies of scale.

Answers

1. The change in output when all inputs increase by the same proportion.
2. 28/40 = 0.7, so decreasing returns.
3. A movement along: it is an internal economy.
4. (10.00 − 12.50)/12.50 × 100 = −20.0%.
5. 18 × 250 = 4,500 cu.
6. TR at 260 units is 17.70 × 260 = 4,602 cu. MR = (4,602 − 4,500)/10 = 10.20 cu.
7. (7.40 − 6.85) × 1,200 = 660 cu.
8. 31,000 − 33,500 = −2,500 cu: subnormal profit.
9. 300 units, the first output at which the minimum of 3.9 cu is reached.
10. For example congestion, and wage or rent increases as firms compete for the same inputs.

Where marks are usually lost

• Writing “economies of scale” when the question asks about the long-run production function, or the reverse. Returns to scale are about output; economies are about cost.
• Using diminishing returns to explain the rising part of the LRAC.
• Saying total cost falls when only average cost falls.
• Drawing an internal economy as a shift of the curve, or an external economy as a movement along it.
• Naming an economy (such as “technical”) without explaining the mechanism that lowers cost per unit.
• Dividing TR by quantity and calling it MR.
• Forgetting that a negative MR means total revenue is falling.
• Calling accounting profit supernormal without deducting normal profit.
• Stopping a long answer at description and giving no evaluation, such as whether lower cost reaches consumers.

Official syllabus

Cambridge International AS & A Level Economics 9708 syllabus for examination in 2026, 2027 and 2028, published by Cambridge University Press & Assessment: statements 7.5.3 to 7.5.10.