Cambridge IGCSE Economics 0455
Syllabus points
- Define fixed, variable, total and average costs.
- Define total and average revenue.
- Explain the objectives of firms and how profit is calculated.
Costs
Firms face two types of cost:
- Fixed costs do not change with output (rent, insurance, machinery) — they must be paid even at zero output.
- Variable costs change with output (raw materials, wages of hourly staff).
| Cost | Formula |
|---|---|
| Total cost (TC) | Fixed cost + Variable cost |
| Average cost (AC) | Total cost ÷ output |
Revenue
Revenue is the money a firm receives from selling its output.
| Revenue | Formula |
|---|---|
| Total revenue (TR) | Price × quantity sold |
| Average revenue (AR) | Total revenue ÷ output (= price) |
Profit
Profit = Total revenue − Total cost
If revenue exceeds cost, the firm makes a profit; if cost exceeds revenue, it makes a loss.
Key definitions
| Term | Definition |
|---|---|
| Fixed cost | A cost that does not change with output. |
| Variable cost | A cost that changes with the level of output. |
| Profit | The surplus of total revenue over total cost. |
Objectives of firms
Firms may aim to:
- Maximise profit — the usual assumed goal.
- Survive — especially new firms or in a downturn.
- Grow — gain market share and economies of scale.
- Serve social aims — some firms and charities pursue ethical goals.
Worked example
A firm sells 1,000 units at £5 each, so total revenue = £5,000. Its fixed costs are £2,000 and variable costs £2,500, so total cost = £4,500. Profit = £5,000 − £4,500 = £500. Average cost = £4,500 ÷ 1,000 = £4.50, which is below the £5 price, confirming the firm is profitable.
Common exam mistakes
- Mixing up fixed and variable costs.
- Forgetting that average revenue equals price.
- Calculating profit as revenue only, ignoring costs.
Exam technique
Practise the formulas and be ready to calculate total cost, revenue, average cost and profit from a data table — a common IGCSE question.
Quick revision
- TC = FC + VC; AC = TC ÷ output.
- TR = price × quantity; AR = price.
- Profit = TR − TC.