Pearson Edexcel International GCSE Economics: Costs, revenue, profit and scale (4EC1) – Revision Notes

Short recall notes for section 1.2.3, Business costs, revenues and profit, in the Pearson Edexcel International GCSE Economics (4EC1) specification, Issue 3, February 2026. For full explanations and extra examples, go to the study guide. Then try the practice questions, tick off topics on the checklist, see the course hub and take a 10-minute diagnostic. All figures are made up for illustration and carry no currency sign. There is one tier of entry.

Formulae (1.2.3 a)

Term	Formula
Total revenue (TR)	price x quantity sold
Total variable costs (TVC)	variable cost per unit x quantity
Total costs (TC)	total fixed costs + total variable costs
Average (total) cost (ATC)	TC / quantity
Average fixed cost	total fixed costs / quantity
Profit	TR - TC
Profit per unit	price - ATC

Fixed costs stay constant as output changes in the short run (rent, lease). Variable costs rise with output (materials, packaging).

Method in steps

1. Write out the formula you need.
2. Substitute the numbers, one line per quantity.
3. Work out TVC first if only a per-unit variable cost is given.
4. Add fixed costs to reach TC.
5. Subtract TC from TR for profit. A negative answer is a loss.
6. State the units and check that average cost times quantity gives total cost.

Worked reminder

A market stall sells 250 scarves at 14. Rent is 600 and each scarf costs 6 to make.

TR  = 250 x 14      = 3,500
TVC = 250 x 6       = 1,500
TC  = 600 + 1,500   = 2,100
Profit = 3,500 - 2,100 = 1,400
ATC = 2,100 / 250   = 8.40

Break-even is where TR = TC, so profit is zero and price equals ATC.

Economies of scale (1.2.3 b)

• Economies of scale: a fall in average cost as the scale of production rises (long run).
• Internal economies of scale: falls in average cost that arise inside a firm because it has grown.
• External economies of scale: falls in average cost that arise because the industry or area has grown.

Internal type	Key phrase	One-line chain
Purchasing (bulk buying)	bigger orders	discount per unit, so lower input cost per unit
Marketing	spread the budget	same advert across more units, so lower cost per unit
Technical	large machines	more output per machine, so lower cost per unit
Financial	trusted borrower	lower interest rate, so lower finance cost per unit
Managerial	specialist managers	skilled finance, sales and production heads, so fewer errors
Risk bearing	many products or markets	losses in one area are covered, so lower risk cost

External type	Key phrase
Skilled labour	trained workers in the area, less training spend
Infrastructure	transport, power and communications built for the industry
Access to suppliers	specialist suppliers nearby, cheaper and quicker supply
Similar businesses in area	shared services and reputation

Must-know distinction. Internal: caused by the firm’s own growth, so the firm moves down its LRAC curve. External: caused by the industry or area growing, so the whole curve moves down.

Diseconomies of scale (1.2.3 c)

Diseconomies of scale: a rise in average cost as the scale of production rises beyond a certain point.

Type	Chain
Bureaucracy	extra rules and layers, so slow decisions and more admin staff
Communication problems	long message chains, so delays and errors
Lack of control	too many teams or sites to supervise, so waste
Distance between top management and workers	out of touch, so lower morale and productivity

Must-know distinctions

Pair	Difference
Fixed and variable costs	Fixed costs stay the same as output changes in the short run; variable costs change with output
Total cost and average cost	Total cost is the whole bill; average cost is the bill divided by units
Economies of scale and spreading fixed costs	Economies of scale are long-run falls in average cost when all inputs can change; spreading fixed costs is what happens to average fixed cost when output rises with the same premises
Internal and external economies	Inside the firm (own growth) or outside it (industry or area growth)
Economies and diseconomies	Falling average cost on the downward part of LRAC; rising average cost on the upward part

More worked reminders

Missing figure. A firm has an average cost of 9.50 at 2,000 units and a price of 11. Total cost is 2,000 x 9.50 = 19,000. Total revenue is 2,000 x 11 = 22,000. Profit is 3,000, or 1.50 per unit (11 - 9.50).

Bulk buying. A shop pays 4.00 per box for fewer than 200 boxes and 3.60 per box for 200 or more. Ordering 250 boxes costs 250 x 3.60 = 900 instead of 1,000. The saving is 100, which is 10% (0.40 / 4.00).

Finding the efficient point from a table.

Output	1,000	2,000	3,000	4,000	5,000
LRAC	14.00	11.00	9.50	10.20	11.80

LRAC is lowest at 3,000 units (9.50), so that is the most efficient output. Between 1,000 and 3,000 there are economies of scale; between 3,000 and 5,000 there are diseconomies.

A model explanation chain

For a question that asks you to explain one economy of scale, make three links:

1. Name the economy: purchasing (bulk buying).
2. Say how it works: the firm orders in large quantities, so suppliers offer a lower price per unit.
3. Say what it does to cost: the firm’s average cost of materials falls, so average cost falls.

Use the same pattern for diseconomies: name it, say what goes wrong, then say how that raises average cost.

The LRAC diagram

Cost
per unit
 |\
 |  \     down: economies of scale
 |    \                                /  up: diseconomies
 |      \_                          _/
 |         \__                  __/
 |            \____        ____/
 |                 \______/   <- most efficient output (lowest LRAC)
 +----------------------------------> Output

Label the x-axis output and the y-axis cost per unit (long run average cost). Downward slope: internal economies. Lowest point: most efficient output. Upward slope: diseconomies.

Worked reminder: LRAC is 6.00 at 20,000 units and 5.40 at 30,000. Total cost rises from 120,000 to 162,000, but average cost falls by 0.60, which is 0.60 / 6.00 = 10%.

Evaluation toolkit

• Does the firm sit left of the lowest point (gains from growth), at it, or right of it?
• Which economy is relevant, and how soon would it arrive?
• Is the industry one where large scale really lowers cost?
• Could better management delay diseconomies?
• Growth also needs finance and brings risk. Say what you would recommend and why.

Command words for this topic

The specification describes the command words in its own table. For this topic:

• Define and What is meant by: give the term’s definition. For “What is meant by” the specification says there must be two separate parts to the definition, so give two ideas, such as a fall in average cost, and as output rises.
• Calculate: use the data given and show your workings.
• Explain: give a statement of fact with two further expansion points, placed in the context of the question.
• Evaluate: write an extended answer that reaches a supported conclusion about the situation.

Quick self-test

1. A firm sells 350 units at 12. What is total revenue?
2. Its total fixed costs are 1,500 and total variable costs are 2,100. Find total costs and profit.
3. Total costs are 40,000 for 5,000 units. Find average cost.
4. Total costs are 7,500 and total fixed costs are 2,400. Find total variable costs.
5. Total fixed costs are 8,000. Find average fixed cost at 400 units and at 800 units.
6. LRAC falls from 6.00 to 5.40. What is the percentage fall?
7. State what is meant by external economies of scale.
8. A growing firm negotiates a lower interest rate on its loan. Name the economy of scale.
9. A new motorway is built near an industrial area. Is the economy internal or external? Name the type.
10. Name the diseconomy: the directors of a large firm rarely visit the factory floor.

Answers

1. 350 x 12 = 4,200.
2. TC = 1,500 + 2,100 = 3,600; profit = 4,200 - 3,600 = 600.
3. 40,000 / 5,000 = 8.00 per unit.
4. 7,500 - 2,400 = 5,100.
5. 8,000 / 400 = 20; 8,000 / 800 = 10.
6. (6.00 - 5.40) / 6.00 = 10%.
7. A fall in average cost because the industry or area has grown, not because of the firm’s own size.
8. Financial (internal).
9. External, type infrastructure.
10. Distance between top management and workers.

Where marks are usually lost

• Quoting total cost where average cost per unit is wanted.
• Leaving fixed costs out of total costs.
• Writing “bigger is cheaper” without saying average cost per unit.
• Listing a type of economy without explaining how it lowers cost.
• Labelling an economy internal when it comes from the area or industry.
• Drawing an LRAC curve with no axis labels or no marked lowest point.
• Describing diseconomies as “higher costs” with no cause such as communication problems.
• Making an evaluation point with no judgement about this firm.

Official syllabus

Pearson Edexcel International GCSE in Economics (4EC1) specification, Issue 3, February 2026, Pearson Education Limited: section 1.2.3, Business costs, revenues and profit.