FIRMS COST REVENUE AND OBJECTIVE

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CIE IGCSE Economics Your notes
3.7 Firms’ Costs, Revenue & Objectives

Contents
3.7.1 Costs & Revenue
3.7.2 Objectives of Firms
Page 1 of 8
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3.7.1 Costs & Revenue

Your notes
Different Types of Costs
In preparing goods/services for sale, firms incur a range of costs. These costs can be be broken into
different categories
1. Fixed costs (FC) are costs that do not change as the level of output changes
These have to be paid whether output is zero or 5000
e.g. building rent, management salaries, insurance, bank loan repayments etc.
2. Variable costs (VC) are costs that vary directly with output
These increase as output increases & vice versa
E.g. raw material costs, wages of workers directly involved in production
3. Total costs (TC) are the sum of the fixed + total variable costs
Page 2 of 8
Cost Calculations
Based on the above definitions, we can calculate several different types of costs Your notes
1. Total costs (TC) = total fixed costs (TFC) + total variable costs (TVC)
2. Total variable cost (TVC) = variable cost (VC) × quantity (Q)
total cost (TC)

3. Average total cost (AC) =
quantity (Q)
Total fixed costs (TFC)

4. Average fixed cost (AFC) =
quantity (Q)
Total variable costs (TVC)

5. Average variable cost (AVC) =
quantity (Q)
Cost Calculations Using the Above Formulas Where VC is $60

TFC TVC TC
Output (Q) TFC TVC = $ 60 x Q TC = TFC + TVC AFC = Q
AVC = Q
AC = Q
0 200 - 200 - - -
1 200 60 260 200 60 260
2 200 120 320 100 60 160
3 200 180 380 66.67 60 126.67
4 200 240 440 50 60 110
5 200 300 500 40 60 100
6 200 360 560 33.34 60 93.33
7 200 420 620 28.58 60 88.57
8 200 480 680 25 60 85
Page 3 of 8
Diagrammatic Representation Of Costs

Sketches Which Represent The Different Costs Of A Firm Your notes
Type of Cost Diagram Explanation
Fixed Cost (FC) The firm has to pay its fixed costs which
do not change, irrespective if the output
is 0 or 100,000 units
The fixed costs for this firm are $4,000
Variable Cost The variable costs initially rise

(VC) proportionally with output, as shown in
the diagram
At some point the firm will benefit from a
purchasing economy of scale and the
rise will no longer be proportional
Total Cost (TC) The total cost is the sum of the variable &
fixed costs
The total costs cannot be 0 as all firms
have some level of fixed costs
Average Fixed If the fixed costs of a firm are $1,000 & it

Cost (AFC) produces 1 unit of output, then its AFC is
$1,000 ($1,000/1)
If the firm increases its output to 1000
units, then the AFC is $1 per
unit ($1000/1,000)
The more units a firm produces, the
lower its AFC will be
Page 4 of 8
This is one reasons why large levels of

output help to increase the profit per unit
Your notes
Average Total As a firm grows, it is able to increases its
Cost (AC) scale of output generating efficiencies
that lower its average total costs (AC) of
production
These efficiencies are called economies
of scale
As a firm continues increasing its scale of
output, it will reach a point where its
average total costs (AC) will start to
increase
The reasons for the increase in the
average costs are called diseconomies
of scale
Exam Tip
MCQ frequently tests your knowledge of these curves by presenting you with 4 unlabelled diagrams &,
for example, asking you to identify which sketch demonstrates the average fixed costs of the firm.
Page 5 of 8
Different Types of Revenue

Total revenue is the total value of all sales a firm incurs Your notes
Total revenue (TR) = selling price (P) × quantity sold (Q)
Average revenue is the overall revenue per unit

TR
Average revenue (AR) =
Q
An Example Of Revenue Calculations
TR
P ($) Q TR (P ×Q) AR
Q
8 1 8 8
7 2 14 7
6 3 18 6
5 4 20 5
4 5 20 4
3 6 18 3
2 7 14 2
1 8 8 1
Average revenue information is especially useful to a firm selling multiple products (e.g.
supermarkets) or a firm that sells the same item at different prices (e.g. rail tickets are usually priced
differently for different types of commuters e.g. pensioners)
Page 6 of 8
3.7.2 Objectives of Firms

Your notes
Objectives of Firms
The objectives of a firm are a reason for their existence or the desired focus of their owners
These objectives typically include profit maximisation, growth, survival & social welfare
1. Profit Maximisation
Most firms have the rational objective of profit maximisation

Profit = Total Revenue (TR) - Total Costs (TC)
To maximise profits, firms can either increase their sales revenue or decrease their costs
Firms continuously analyse their costs to see if they can reduce them so that profit can be
maximised
2. Growth
Some firms have the business objective of growth

In subtopic 3.5 we considered the different metrics that firms use to compare their size which include
the number of employees, market share, size of profits & market capitalisation
Firms with a growth objective often focus on increasing their sales revenue or market share
Firms will also maximise revenue in order to increase output & benefit from economies of scale
A growing firm is less likely to fail
3. Survival
In the short term, many new firms focus solely on business survival
Generally, as much as 25% of new firms fail in their first year of business
Once a firm is established, it may then begin to focus on profit maximisation as its new objective
4. Social Welfare
More firms than ever are launching with a social welfare objective
These typically include a focus on climate action & addressing poverty or inequality
They still require profit to survive, but will accept less than if they were profit maximising as long as they
are meeting their social objective
Page 7 of 8
Exam Tip
Your notes
The objectives of firms can change over time. Successful firms that have been profit maximising for
decades may find themselves in a a difficult market environment (e.g. during Covid 19 lock downs) &
switch their objective to survival. Likewise, firms previously focussed on profit maximisation may desire
to be more prominent in the battle against climate change & so change to a social welfare objective.
Page 8 of 8

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CIE IGCSE Economics Your notes

3.7 Firms’ Costs, Revenue & Objectives

3.7.1 Costs & Revenue

2. Total variable cost (TVC) = variable cost (VC) × quantity (Q)

total cost (TC)

Total fixed costs (TFC)

Total variable costs (TVC)

Cost Calculations Using the Above Formulas Where VC is $60

Diagrammatic Representation Of Costs

Type of Cost Diagram Explanation

Variable Cost The variable costs initially rise

Average Fixed If the fixed costs of a firm are $1,000 & it

This is one reasons why large levels of

Different Types of Revenue

Average revenue is the overall revenue per unit

An Example Of Revenue Calculations

3.7.2 Objectives of Firms

Most firms have the rational objective of profit maximisation

Some firms have the business objective of growth

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