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

This guide covers section 3.7, Firms’ costs, revenue and objectives, of the Cambridge IGCSE Economics 0455 syllabus for examination in 2026. It sits inside Topic 3, Microeconomic decision makers, and the syllabus is not tiered. The official text says marginal cost and marginal revenue are not required, so this guide does not use them. All figures are invented and illustrative, and all money amounts are in dollars.

Related pages: the Topic 3 overview, the revision notes, the practice questions, the course hub, the printable checklist and the free diagnostics.

What this unit covers

Syllabus	You must be able to
3.7.1	Define total cost (TC), average total cost (ATC), fixed cost (FC), variable cost (VC), average fixed cost (AFC) and average variable cost (AVC)
3.7.2	Calculate each of these; define, draw and read diagrams of how costs respond to a change in output
3.7.3	Define total revenue (TR) and average revenue (AR)
3.7.4	Calculate TR and AR; explain the influence of sales on revenue
3.7.5	Explain the objectives of firms: survival, social welfare, profit maximisation and growth

3.7.1 Costs of production: the six definitions

A cost is what a firm pays to produce. Costs are split by whether they change with output.

Term	Meaning	Example for a candle workshop
Fixed cost (FC)	Cost that stays the same as output rises or falls	Weekly rent, insurance
Variable cost (VC)	Cost that rises as output rises	Wax, wicks, packaging
Total cost (TC)	All the costs of producing a given output: FC + VC	Rent plus materials for the week
Average fixed cost (AFC)	Fixed cost per unit: FC ÷ output	Rent spread over each candle
Average variable cost (AVC)	Variable cost per unit: VC ÷ output	Materials in one candle
Average total cost (ATC)	Total cost per unit: TC ÷ output	Full cost of one candle

Two links are worth memorising because they let you check any answer:

• TC = FC + VC
• ATC = AFC + AVC

Fixed costs are fixed only in the sense that they do not move with output over the period being studied. They still have to be paid if output is zero. At zero output, TC equals FC and VC is zero.

3.7.2 Calculating costs

Worked example 1: a cost table

Hilltop Candles is an invented workshop with fixed cost of 600 a week. Its variable costs at each weekly output are in the second column.

Output	VC (dollars)	TC (dollars)	AFC (dollars)	AVC (dollars)	ATC (dollars)
10	350	950	60	35	95
20	600	1,200	30	30	60
30	780	1,380	20	26	46
40	1,000	1,600	15	25	40
50	1,300	1,900	12	26	38
60	1,740	2,340	10	29	39

Working for 30 candles:

1. TC = FC + VC = 600 + 780 = 1,380.
2. AFC = 600 ÷ 30 = 20.
3. AVC = 780 ÷ 30 = 26.
4. ATC = 1,380 ÷ 30 = 46.
5. Check: AFC + AVC = 20 + 26 = 46. This matches.

Working backwards is also common. If ATC is 40 at 40 candles, TC = 40 × 40 = 1,600. If AFC is 12 at 50 candles, FC = 12 × 50 = 600. Always multiply an average by output to get the total back.

Drawing the cost diagram

Put output on the horizontal axis and cost on the vertical axis. There are two sets of curves.

Total cost curves. FC is a flat line at 600. VC begins at the origin and climbs. TC begins at 600 on the vertical axis (the FC level) and sits exactly 600 above VC at every output, so the two curves never converge.

Average cost curves. In words, from the table:

Curve	Shape	Lowest point in example 1
AFC	Falls throughout	None (approaches the axis)
AVC	U-shaped	25, at 40 candles
ATC	U-shaped, above AVC	38, at 50 candles

In your own diagram, plot the table and show these features:

• AFC slopes down all the way. It keeps approaching the horizontal axis without reaching it, because FC never reaches zero.
• AVC falls, reaches a lowest point (at 40 candles here), then rises.
• ATC also falls, then rises. Its lowest point (38 at 50 candles) lies further right than the lowest AVC point, because AFC is still falling when AVC starts to rise.
• ATC lies above AVC. The vertical gap between them at any output equals AFC, so the gap narrows as output rises.

Label both axes, label each curve, and mark the output at which ATC is lowest.

Interpreting the diagram

• Why AFC falls. The same 600 is shared among more candles. At 10 candles each carries 60 of rent; at 60 each carries 10.
• Why AVC and ATC fall at first. In this example, extra output lets workers specialise and materials be bought in larger lots. You can state these as possible reasons without a full theory.
• Why they rise later. The workshop becomes crowded, machines are over-used or overtime is paid, so each extra candle costs more in variable cost.
• Using the lowest point. The output with the lowest ATC is the output at which each unit costs least to make. It is not automatically the profit-maximising output, because that depends on revenue as well.

3.7.3 Revenue: the two definitions

Total revenue (TR) is the sum a firm takes in from its sales: price × quantity sold.

Average revenue (AR) is revenue per unit sold: TR ÷ quantity. If every unit is sold at the same price, AR equals the price.

Revenue is not profit. Profit is TR minus TC. A firm with a high TR can still make a loss.

3.7.4 Calculating revenue and the influence of sales

Worked example 2: revenue and profit

Hilltop Candles sells every candle at 45. Using the cost table in example 1:

Output	TR (dollars)	TC (dollars)	Profit (dollars)
30	1,350	1,380	-30
40	1,800	1,600	200
50	2,250	1,900	350
60	2,700	2,340	360

At 30 candles TR is 45 × 30 = 1,350, which is less than TC, so there is a loss of 30. At 60 candles, AR is 45 and ATC is 39, so profit per candle is 6. Profit = 6 × 60 = 360, the same as 2,700 − 2,340. The “AR − ATC” route is a quick check.

Sales and revenue

When the price stays the same, more sales mean more revenue. Going from 40 to 50 candles at 45 raises TR from 1,800 to 2,250, a rise of 450.

The link is less simple when a firm must cut its price to sell more. Revenue then depends on whether the extra sales outweigh the lower price on every unit.

Worked example 3: price cuts

A stall selling hand-printed tote bags (invented figures) records these weekly results.

Price (dollars)	Bags sold	TR (dollars)	AR (dollars)
12	100	1,200	12
10	130	1,300	10
8	150	1,200	8
6	160	960	6

Step by step: TR = price × bags sold, so 12 × 100 = 1,200, 10 × 130 = 1,300, 8 × 150 = 1,200 and 6 × 160 = 960. AR = TR ÷ bags sold, which gives back the price each time.

Interpretation:

• From 12 to 10, price falls 17% (2 ÷ 12) but sales rise 30%, so TR rises by 100.
• From 10 to 8, price falls 20% while sales rise only about 15% (20 ÷ 130), so TR falls by 100.
• Sales rose at every price cut, yet TR rose only once. More sales do not guarantee more revenue.

Be careful with what this does and does not show. It shows TR can rise or fall when price is cut. It does not say which price maximises profit, because costs have not been included. Lower sales also mean lower VC, so a lower-revenue option can still earn more profit.

3.7.5 Objectives of firms

An objective is what a firm is trying to achieve. Different firms, and the same firm at different times, have different objectives.

Objective	What the firm aims to do	Who is likely to pursue it
Survival	Stay in business: cover costs, avoid closing	A new firm, or any firm in a weak market
Profit maximisation	Make the largest gap between TR and TC	Owners and shareholders seeking a return
Growth	Increase the size of the firm: sales, output, outlets	A firm wanting a bigger presence or lower unit costs
Social welfare	Benefit the community, not mainly the owners	A charity, social enterprise or government-owned provider

How each objective affects decisions

Survival. A new firm facing strong competition may cut prices, accept low profit or delay its own pay to keep trading. Success is measured by being open next year, not by the size of profit.

Profit maximisation. The firm compares revenue and cost at different outputs and prices, then picks the one with the biggest positive gap. It may cut costs, raise efficiency or charge more where customers will pay.

Growth. A firm may accept lower profit now to build a larger customer base. Chain of reasoning: lower price → more sales → higher TR and a larger share of the market → possible fall in ATC as FC is spread over more units → stronger position later. The risk is that profit falls, or the firm borrows heavily and cannot repay.

Social welfare. A social enterprise might sell a product at low prices to poor households, or employ people who find it hard to get work. It still needs TR to cover TC, otherwise it cannot survive, but it does not try to make the largest possible profit.

Worked example 4: the same firm, two objectives

Hilltop Candles at 45 earns 360 profit at 60 candles. A rival opens nearby and the owner thinks about cutting the price to 41 to hold her customers. At 60 candles, TR would be 41 × 60 = 2,460 and profit 2,460 − 2,340 = 120.

• If her objective is profit maximisation, giving up 240 of profit looks poor unless the price cut is certain to prevent a bigger loss of sales.
• If her objective is survival, the cut may make sense because TR still covers TC and the workshop stays open.

The calculation is the same in both cases. The objective decides whether the answer is “good”.

Evaluating objectives

Objectives often conflict. Profit now may reduce growth later, and social goals can reduce profit. Good evaluation says which objective is likely to matter most and why, using the facts given:

• Size and age of the firm: young firms often put survival first.
• Ownership: shareholders usually expect profit; a charity does not.
• Competition: strong rivals push firms towards survival or growth through lower prices.
• Time period: growth may sacrifice short-run profit for long-run profit.
• Objectives can combine. A firm may seek growth subject to making enough profit to survive.

Common errors

• Writing “TC = AFC + AVC”. AFC and AVC add to give ATC, not TC.
• Dividing the wrong total: AVC is VC ÷ output, not TC ÷ output.
• Treating a fixed cost as zero when output is zero. FC still has to be paid.
• Drawing AFC as a curve that turns up, or ATC and AVC meeting each other. The gap between ATC and AVC is AFC and never vanishes.
• Using “revenue” and “profit” as if they meant the same thing.
• Assuming a price cut always raises TR, or always reduces it.
• Giving a list of objectives without linking one to the firm in the question.

Next steps

Condense this with the revision notes, then test yourself with the practice questions. Tick off the topic on the checklist, or try a free diagnostic.

Official syllabus

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