Cambridge O Level Economics: Costs, revenue and objectives of firms (2281) – Revision Notes

These are condensed notes for section 3.7, Firms’ costs, revenue and objectives (3.7.1 to 3.7.5), of the Cambridge O Level Economics 2281 syllabus for examination in 2026, version 2. The syllabus is not tiered and says marginal cost and marginal revenue are not required. For full explanations and longer worked examples, use the study guide. All firms and figures here are invented and illustrative.

Also useful: the practice questions, the Topic 3 overview, the course hub, the printable checklist and the free diagnostics to find weak spots.

Definitions and formulas (3.7.1, 3.7.3)

Term	Meaning	Formula
Fixed cost (FC)	Cost unaffected by how much is made	Given, or AFC × output
Variable cost (VC)	Cost that moves with the amount made	Given, or AVC × output
Total cost (TC)	All costs of a given output	FC + VC, or ATC × output
Average fixed cost (AFC)	Fixed cost carried by each unit	FC ÷ output
Average variable cost (AVC)	Variable cost of each unit	VC ÷ output
Average total cost (ATC)	Full cost of each unit	TC ÷ output, or AFC + AVC
Total revenue (TR)	All sales receipts	Price × quantity sold
Average revenue (AR)	Receipts for each unit sold	TR ÷ quantity sold
Profit	Receipts left once costs are paid	TR − TC

Typical fixed costs: rent, insurance, loan repayments, a salaried manager. Typical variable costs: raw materials, packaging, energy used in production, piece-rate pay.

Method: a cost question in five steps

1. Write down the output the question asks about.
2. Find FC and VC (or TC) in the data. Work backwards if you need to.
3. TC = FC + VC.
4. Divide each of FC, VC and TC by output to get AFC, AVC and ATC.
5. Check that AFC + AVC = ATC.

Worked reminder. FC is 1,200 and VC is 2,800 at 100 units. TC = 1,200 + 2,800 = 4,000. AFC = 1,200 ÷ 100 = 12. AVC = 2,800 ÷ 100 = 28. ATC = 4,000 ÷ 100 = 40. Check: 12 + 28 = 40.

Working backwards. Averages multiply back to totals: FC = AFC × output, VC = AVC × output, TC = ATC × output. If you know ATC and AVC, then AFC = ATC − AVC.

Worked reminder: filling a gap. A table gives output 50, TC 3,000 and AFC 20. FC = 20 × 50 = 1,000. VC = 3,000 − 1,000 = 2,000. AVC = 2,000 ÷ 50 = 40. ATC = 3,000 ÷ 50 = 60, and AFC + AVC = 20 + 40 = 60, so the table agrees.

Reading a cost table. Scan down each average column. AFC always falls. Note the output where AVC is lowest and where ATC is lowest; ATC’s lowest point comes at the same output as AVC’s or to the right of it. If a question asks why, use figures: after AVC begins to rise, AFC may still be falling by more.

Cost diagrams (3.7.2)

Curve	Shape as output rises	Reason
FC	Flat, horizontal	Same at every output
VC	Starts at the origin, rises	More output needs more inputs
TC	Starts at the FC level on the vertical axis; parallel to VC	TC − VC = FC at every output
AFC	Keeps falling, stays above the axis	One FC spread over more units
AVC	U-shaped	Dips while extra output is cheap to make, then climbs once the firm is crowded
ATC	U-shaped, above AVC; lowest point to the right of AVC’s	The gap is AFC, which keeps falling

Always label the axes (output on the horizontal, cost or cost per unit on the vertical) and every curve. Describe diagrams in words if asked to explain: say where the curve starts, which way it moves and why.

Revenue and the influence of sales (3.7.4)

Method. TR = price × quantity. AR = TR ÷ quantity.

Worked reminder. A taxi firm (invented) gives 320 rides at 7.50. TR = 320 × 7.50 = 2,400. Its TC is 2,240, so ATC = 2,240 ÷ 320 = 7.00 and profit = 2,400 − 2,240 = 160. As a check, profit per ride is AR − ATC = 7.50 − 7.00 = 0.50, and 0.50 × 320 = 160.

Worked reminder: a price cut. A café (invented) sells 200 cups at 3.00, then 230 cups at 2.70. TR rises from 600 to 621. Price fell 10% and sales rose 15%, so the rise in sales outweighs the cut and TR rises by 21. Had sales risen only to 210, TR would be 567, a fall, because 5% is smaller than 10%.

Effect of sales on revenue.

• Same price, more sales: TR rises in proportion. AR stays equal to the price.
• Price cut: TR rises only if the percentage rise in sales is bigger than the percentage fall in price.
• Price rise: TR rises only if the percentage fall in sales is smaller than the percentage rise in price.
• Discounts: AR falls below the list price because some units sell for less.
• Higher TR does not always mean higher profit. If extra output raises TC by more than TR, profit falls.

Objectives of firms (3.7.5)

Objective	What the firm does	Typical evidence	Limit or risk
Survival	Covers costs, avoids closing	New firm, recession, strong rivals	Little spare money to invest
Social welfare	Puts society’s benefit first	Charity, cooperative, community service	Needs donations or subsidy if prices are below cost
Profit maximisation	Widest gap between TR and TC	Owners want a return on their money	May reduce quality or ignore workers
Growth	Raises sales, output or market share	Price cuts, new outlets	Profit may fall now; borrowing risk

Objectives overlap and can change over time. A start-up may aim for survival, then growth, then profit.

Evaluation chains for objectives

• Growth: lower price, then more sales, then bigger market share, then possibly lower average cost later. Against: less profit now, and rivals may copy the cut.
• Survival: price covers costs, so the firm stays open. Against: no spare money to invest, and the firm may be stuck at low profit.
• Profit maximisation: raise the gap between TR and TC by lifting price or cutting cost. Against: lower quality, unhappy workers, lost customers.
• Social welfare: fares or prices set for the benefit of users. Against: losses need a subsidy or donations.

To evaluate, name the condition that decides the answer, such as how much money the owners have, how strong competition is, or whether a subsidy exists, and then reach a judgement.

Must-know distinctions

• AFC and FC. FC is constant; AFC falls as output rises.
• VC and AVC. VC always rises with output; AVC can fall then rise.
• TR and AR. TR is the total; AR is per unit and equals price when all units sell at one price.
• Revenue and profit. Profit is TR − TC.
• Break-even and loss. Break-even is TR = TC. Below that, a loss.

Quick self-test

1. Define average variable cost.
2. FC is 600 and output is 30. Find AFC.
3. TC is 5,200 at 40 units. Find ATC.
4. AFC is 8 at 50 units. Find FC.
5. ATC is 25 and AVC is 18. Find AFC.
6. A firm sells 75 units at 12. Find TR.
7. TR is 1,350 from 90 units. Find AR.
8. Price falls from 20 to 18 and sales rise from 100 to 106. Does TR rise or fall? Give the numbers.
9. What is the vertical gap between the TC and VC curves?
10. A bus firm keeps an unprofitable rural route open and charges fares below cost. Which objective is this?
11. Why does AFC fall as output rises?
12. At 40 units, price is 15 and ATC is 15. What is the profit?

Answers

1. Variable cost divided by output.
2. 600 ÷ 30 = 20.
3. 5,200 ÷ 40 = 130.
4. 8 × 50 = 400.
5. 25 − 18 = 7.
6. 75 × 12 = 900.
7. 1,350 ÷ 90 = 15.
8. TR falls from 100 × 20 = 2,000 to 106 × 18 = 1,908. Price fell 10% but sales rose only 6%.
9. It equals fixed cost, at every output.
10. Social welfare.
11. The same fixed cost is shared among more units.
12. AR equals ATC, so profit per unit is 0 and total profit is 0. The firm breaks even.

Where marks are usually lost

• Writing “TC” when the question asks for the average, or the reverse.
• Forgetting to add FC when going from VC to TC.
• Dividing by the wrong output when a table has several rows.
• Saying fixed costs “rise” or “fall” with output.
• Starting the TC curve at the origin.
• Leaving axes or curves unlabelled.
• Defining an objective but never tying it to the evidence about the firm.
• Assuming the output with the highest TR has the highest profit.

Official syllabus

Cambridge International, Cambridge O Level Economics 2281 syllabus for examination in 2026, version 2, section 3.7. Cambridge University Press & Assessment.