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

This guide covers section 1.2.3, Business costs, revenues and profit, of the Pearson Edexcel International GCSE Economics (4EC1) specification, Issue 3, February 2026. It sits in the Microeconomics and Business Economics theme. The specification has one tier of entry, so nothing here is reserved for one group. Every firm and number below is made up for illustration, with money shown as plain amounts and no currency sign.

Links: course hub, printable checklist, revision notes, practice questions, the broader guide to production and business costs and the 10-minute diagnostics.

Coverage of 1.2.3

Ref	Skill
1.2.3 a	Define, and calculate with, total revenue, total costs, fixed and variable cost totals, average (total) cost and profit
1.2.3 b	Define economies of scale, internal and external; explain six internal types and four external types
1.2.3 c	Define diseconomies of scale; explain four types; use an annotated long run average cost (LRAC) diagram

1. Costs, revenue and profit (1.2.3 a)

Fixed costs stay the same whatever the output in the short run, such as rent or a lease. Variable costs rise as output rises, such as ingredients or packaging. Add them to get total costs.

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

Average fixed cost is TFC / quantity and average variable cost is TVC / quantity. They add up to ATC.

Worked example 1: a small bakery

The Hill Street Bakery sells 600 loaves a week at a price of 3.50. Rent and oven lease cost 900 a week. Ingredients and packaging cost 1.20 per loaf.

TR  = 600 x 3.50        = 2,100
TVC = 600 x 1.20        =   720
TC  = 900 + 720         = 1,620
Profit = 2,100 - 1,620  =   480
ATC = 1,620 / 600       = 2.70   (check: 900/600 + 1.20 = 1.50 + 1.20)

Next week it sells 900 loaves at the same price: TR is 3,150, TVC is 1,080, TC is 1,980, profit is 1,170 and ATC is 2.20. Output rose by 50%, but the rent did not change. Fixed costs were spread over more loaves, so cost per loaf fell.

Worked example 2: reading a cost table

Kestrel Candles has total fixed costs of 2,400. It sells each candle at 16.

Output	TVC	TC	ATC	TR	Profit
100	1,200	3,600	36.00	1,600	-2,000
200	2,000	4,400	22.00	3,200	-1,200
300	2,400	4,800	16.00	4,800	0
400	2,800	5,200	13.00	6,400	1,200
500	3,600	6,000	12.00	8,000	2,000
600	5,100	7,500	12.50	9,600	2,100
700	7,400	9,800	14.00	11,200	1,400

Working for 500 candles: TC = 2,400 + 3,600 = 6,000; ATC = 6,000 / 500 = 12.00; TR = 500 x 16 = 8,000; profit = 8,000 - 6,000 = 2,000.

Three readings:

• At 300 candles, ATC equals the price (16) and profit is zero. The firm just covers its costs.
• ATC is lowest at 500 candles (12.00).
• Profit is highest at 600 candles (2,100), even though ATC there is higher. The lowest cost per unit is not automatically the highest profit, because profit also depends on how many units are sold.

2. Economies of scale (1.2.3 b)

Economies of scale are the drop in cost per unit that happens when a firm expands its scale of production. They are a long-run idea, because every input, including premises and machinery, can change.

Internal economies of scale are falls in average cost that arise inside the firm because the firm itself has grown. External economies of scale are falls in average cost that arise because the whole industry or area has grown, whatever the size of the individual firm.

Internal economies: six types

Type	Cause	Why average cost falls
Purchasing (bulk buying)	Larger orders	Suppliers give discounts per unit
Marketing	Larger sales	One advertising budget is spread over more units
Technical	Larger output	Bigger or more automated machines produce each unit more cheaply
Financial	Larger, established firm	Lenders see lower risk and charge lower interest
Managerial	Larger workforce	Specialist managers can be hired for finance, sales or production
Risk bearing	Larger range of products or markets	A fall in one market is covered by others, so fewer costly failures

Short calculations:

• Purchasing: a baker pays 0.80 per kilogram of flour, but 0.68 on orders above 10 tonnes. The saving is 0.12 per kilogram, which is 0.12 / 0.80 = 15%. On an order of 12,000 kg it is 12,000 x 0.12 = 1,440.
• Marketing: an advertising campaign costs 12,000. Spread over 20,000 units it adds 0.60 per unit. Spread over 60,000 units it adds 0.20.
• Financial: a loan of 200,000 at 9% costs 18,000 a year in interest. A larger firm borrowing at 6.5% pays 13,000, saving 5,000.

External economies: four types

Type	What happens	Effect on cost
Skilled labour	Colleges and workers gather where an industry is based	Firms recruit trained staff and spend less on training
Infrastructure	Roads, ports, power and broadband are built for the industry	Lower transport and energy costs
Access to suppliers	Specialist suppliers set up nearby	Faster, cheaper delivery of inputs and repairs
Similar businesses in area	Firms share ideas, services and a reputation	Shared services and easier selling

Internal or external? Ask who caused it. If the firm’s own growth caused it, it is internal. If the growth of the industry or district caused it, it is external. A firm cannot create external economies alone.

3. Diseconomies of scale (1.2.3 c)

Diseconomies of scale are a rise in cost per unit when a firm expands its scale of production beyond a certain point.

Type	What goes wrong	Why average cost rises
Bureaucracy	More rules, forms and layers of approval	Slower decisions; more administrative staff to pay
Communication problems	Messages pass through many people	Mistakes, delays and repeated work
Lack of control	Managers cannot supervise every site or team	Waste, poor quality and lower effort
Distance between top management and workers	Directors lose contact with the shop floor	Workers feel unimportant and productivity falls

Build each point as a chain: cause, effect on the firm, effect on average cost. For example: the firm opens many branches, so instructions pass through several managers, so messages are delayed or distorted, so staff make errors that need correcting, so average cost rises.

4. The LRAC diagram (1.2.3 c)

The long run average cost (LRAC) curve gives the lowest unit cost the firm can reach at each output once every input is adjustable. Output goes on the x-axis and cost per unit on the y-axis.

Cost
per unit
 |\
 |  \      Downward slope:
 |    \    internal economies of scale
 |      \                              /   Upward slope:
 |        \                          /     diseconomies of scale
 |          \_                    _/
 |             \__            __/
 |                \___    ___/
 |                    \__/   <- lowest point: most efficient output
 +--------------------------------------> Output

Annotate three things: the downward slope as internal economies of scale, the upward slope as diseconomies of scale, and the lowest point as the output where the business is most efficient, with the lowest cost per unit.

External economies are different. They lower the whole curve, moving it down, rather than moving the firm along it.

Worked example 3: Delta Foods

Output	LRAC	Total cost
10,000	8.00	80,000
20,000	6.50	130,000
30,000	5.50	165,000
40,000	5.00	200,000
50,000	5.20	260,000
60,000	5.80	348,000

• Total cost = LRAC x output, for example 40,000 x 5.00 = 200,000.
• From 10,000 to 40,000 units, LRAC falls: internal economies of scale. The fall is 8.00 - 5.00 = 3.00, which is 3.00 / 8.00 = 37.5%.
• From 40,000 to 60,000, LRAC rises: diseconomies of scale. The rise is 5.80 - 5.00 = 0.80, which is 0.80 / 5.00 = 16%.
• The most efficient output is 40,000 units, where LRAC is lowest.
• If the price is 7, profit at 40,000 units is 40,000 x 7 - 200,000 = 80,000, or 2.00 per unit.

5. Evaluating scale

A longer answer should weigh the points. Useful lines of argument:

• Size of the firm. A firm far below its most efficient output gains most from growing. One near it gains little, and one beyond it may lose.
• Type of economy. Bulk-buying savings come quickly. Managerial and technical economies need hiring and investment first, so costs may rise before they fall.
• Industry. Where machines or marketing dominate costs, the downward slope is long. Where personal service dominates, the lowest point may be reached at a small scale.
• Management quality. Good communication systems, delegation and local decision-making can delay diseconomies.
• Other aims. Lower average cost helps profit and may allow lower prices, but growth also brings risk, borrowing and a loss of the owner’s control.

Common errors

• Confusing economies of scale with spreading fixed costs in the short run. Economies of scale are long-run and involve changing all inputs.
• Saying “costs fall” without saying average (per unit) cost. Total cost rises as output rises.
• Mixing up internal and external. Cheaper bulk orders are internal; a new port near the factory is external.
• Writing “the firm gets too big” with no named diseconomy and no link to cost.
• Leaving out units, or forgetting that TC includes fixed costs.

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.