Cambridge IGCSE Economics: Costs, revenue and objectives of firms (0455) – Revision Notes

These notes condense section 3.7, Firms’ costs, revenue and objectives, of the Cambridge IGCSE Economics 0455 syllabus for examination in 2026. For full explanations and more worked examples, read the study guide. The syllabus says marginal cost and marginal revenue are not required, so they are left out. Money amounts are in dollars and all figures are invented.

Also useful: the Topic 3 overview, the practice questions, the course hub, the checklist and the free diagnostics.

Definitions (3.7.1 and 3.7.3)

Term	Definition	Formula
Fixed cost (FC)	Cost that stays the same whatever the output	Given, or TC − VC
Variable cost (VC)	Cost that changes with output	Given, or TC − FC
Total cost (TC)	All costs of producing a given output	FC + VC
Average fixed cost (AFC)	Fixed cost per unit	FC ÷ output
Average variable cost (AVC)	Variable cost per unit	VC ÷ output
Average total cost (ATC)	Total cost per unit	TC ÷ output, or AFC + AVC
Total revenue (TR)	Sum taken in from sales	Price × quantity sold
Average revenue (AR)	Revenue per unit sold	TR ÷ quantity sold
Profit	What is left after costs	TR − TC

Examples of fixed costs: rent, insurance, a loan repayment. Examples of variable costs: raw materials, packaging, power used by machines, pay that depends on units made. Some costs are mixed, so read the scenario to see whether a cost moves with output.

Method in steps: a cost table (3.7.2)

1. Write FC as a constant for every output.
2. VC is usually given. TC = FC + VC.
3. Divide each total by that row’s output to get AFC, AVC and ATC.
4. Check every row: AFC + AVC must equal ATC.
5. Find the lowest ATC. That is the output where each unit costs least.

Worked table: a juice bar (invented)

Fixed cost is 1,200 a month.

Output	VC	TC	AFC	AVC	ATC	TR at 7.50	Profit
200	1,000	2,200	6.00	5.00	11.00	1,500	-700
400	1,800	3,000	3.00	4.50	7.50	3,000	0
600	2,400	3,600	2.00	4.00	6.00	4,500	900
800	3,800	5,000	1.50	4.75	6.25	6,000	1,000

Working for 600 drinks: TC = 1,200 + 2,400 = 3,600. AFC = 1,200 ÷ 600 = 2. AVC = 2,400 ÷ 600 = 4. ATC = 3,600 ÷ 600 = 6, and 2 + 4 = 6. TR = 7.50 × 600 = 4,500, so profit = 4,500 − 3,600 = 900.

Reading the table:

• ATC is lowest at 600 drinks (6.00), but profit is highest at 800 (1,000). Lowest ATC is not the same as highest profit.
• At 400 drinks, TR equals TC, so the bar earns exactly enough to cover all costs and profit is zero.
• At 200 drinks, TR is below TC, so there is a loss of 700.

Reverse calculations

Given	Find	Method
ATC 14 at 250 units	TC	14 × 250 = 3,500
AFC 3 at 300 units	FC	3 × 300 = 900
TC 5,200 and FC 2,000	VC	5,200 − 2,000 = 3,200

Cost diagram summary (3.7.2)

Axes: output on the horizontal axis, cost (or cost per unit) on the vertical axis.

Curve	What it looks like	Why
FC	Flat line	Does not change with output
VC	Begins at the origin and climbs	No output means no variable cost
TC	Begins at the FC level, always FC above VC	TC − VC is always FC
AFC	Slopes down, never touches the axis	Same FC shared over more units
AVC	U-shaped	Falls with efficiency gains, rises as the firm becomes crowded or over-used
ATC	U-shaped, above AVC	The gap between ATC and AVC is AFC, so it narrows

In a full diagram, the lowest ATC is usually further right than the lowest AVC, because AFC is still falling when AVC begins to rise. In the juice bar table both are lowest at 600 among the four outputs shown, but four rows cannot show the exact turning points, so say “lowest of the outputs given” if you are reading from a table.

Command words for this unit

• Define: give the meaning, for example “fixed cost is a cost that stays the same as output changes”.
• Calculate: show the formula, the substitution and the answer with units.
• Explain: give a reason and a link, for example why AFC falls as output rises.
• Identify: pick the objective or cost from the scenario and quote the evidence.
• Evaluate: weigh both sides, then reach a judgement that uses the firm’s facts.

Revenue and sales (3.7.4)

• Constant price: if sales rise from 400 to 600 at 7.50, TR rises from 3,000 to 4,500.
• AR equals the price when all units sell at one price.
• If a firm must cut price to sell more, TR can rise, stay flat or fall. Always calculate price × quantity at each price and compare.
• Revenue is not profit. A rise in sales raises profit only if the extra TR is more than the extra cost of producing them.

Worked reminder: price cut

A greengrocer (invented) sells 500 kg of apples at 3.00 a kilo. TR = 1,500 and AR = 3.00. After a cut to 2.60 it sells 600 kg. TR = 2.60 × 600 = 1,560, a rise of 60. The cut raised revenue, but you cannot say whether profit rose until the cost of the extra 100 kg is known.

Objectives of firms (3.7.5)

Objective	Meaning	Typical firm	Typical behaviour
Survival	Stay in business	New or struggling firm	Cut prices, cut costs, accept low profit
Profit maximisation	Largest TR − TC	Owner-run or shareholder firm	Raise efficiency, charge what customers will pay
Growth	Become larger	Expanding firm	Advertise, open outlets, accept low profit now
Social welfare	Benefit the community	Charity, social enterprise, state-owned firm	Low prices, jobs for the disadvantaged, break even

Evaluation checklist

• Link the objective to the firm: age, size, owner, competition.
• Say what the firm gives up. Growth may reduce short-run profit; social goals may reduce profit; high profit may need high prices.
• Say how objectives overlap. Survival needs TR to cover TC, so even a social enterprise cannot ignore revenue.
• Give a judgement: which is most likely for this firm, and why?

Must-know distinctions

Pair	Difference
FC and VC	FC is the same at every output; VC changes
TC and ATC	TC is a total; ATC is per unit
AFC + AVC	Adds to ATC, not to TC
Revenue and profit	Profit is revenue minus total cost
Lowest ATC and highest profit	Different questions: one uses costs only, the other uses costs and revenue
Survival and profit maximisation	Survival needs costs covered; maximisation seeks the largest gap

Quick self-test

1. Fixed cost is 900 and output is 300. Find AFC.
2. Variable cost is 2,400 and output is 300. Find AVC.
3. Use your answers to questions 1 and 2 to find ATC, then check by finding TC first.
4. A firm has ATC of 14 at 250 units. Find TC.
5. A firm sells 500 units and receives 7,500. Find AR.
6. AR is 20 and 340 units are sold. Find TR.
7. TC is 5,000 and TR is 5,600. Find profit.
8. Which of FC and VC rises when output rises?
9. Which objective is shown by a café cutting prices during a slump to avoid closing?
10. Price falls from 10 to 8 and sales rise from 130 to 150. Does TR rise or fall? Show the numbers.

Answers

1. AFC = 900 ÷ 300 = 3.
2. AVC = 2,400 ÷ 300 = 8.
3. ATC = 3 + 8 = 11. Check: TC = 900 + 2,400 = 3,300; 3,300 ÷ 300 = 11.
4. TC = 14 × 250 = 3,500.
5. AR = 7,500 ÷ 500 = 15.
6. TR = 20 × 340 = 6,800.
7. Profit = 5,600 − 5,000 = 600.
8. VC. FC stays the same.
9. Survival.
10. TR falls: 10 × 130 = 1,300 and 8 × 150 = 1,200, a fall of 100.

Where marks are usually lost

• Writing TC = AFC + AVC instead of ATC = AFC + AVC.
• Dividing TC by output when the question asks for AVC or AFC.
• Giving a number with no label or unit. Say “ATC = 11 dollars per unit”.
• Leaving out the working on a calculation. Show the formula, the substitution and the answer.
• Drawing AFC with a U shape, or ATC below AVC.
• Defining fixed cost as “cost that never changes”. It does not change with output over the period.
• Saying a price cut “always increases revenue” or “always decreases revenue”.
• Naming an objective without applying it to the firm in the question.
• Treating profit maximisation as the only objective every firm has.

Official syllabus

Cambridge IGCSE Economics 0455 syllabus for examination in 2026, version 2, Cambridge University Press & Assessment (Cambridge International), section 3.7.