Business Costs, Revenues & Profit

Revise Business Costs, Revenues & Profit for Economics (Edexcel) 4EC1 (O Level) — revision notes and instant AI marking.

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Edexcel IGCSE Economics

Business Costs, Revenues & Profit

Big idea: Every business has to spend money to make things (costs), earns money from selling them (revenue), and the gap between the two is what decides whether it's winning or losing — and as a business gets bigger, that gap can get better or worse depending on how well it handles its own size.

📋 Summary — The Whole Chapter in One Glance

Read this first. Come back to it after you've studied everything else.

Fixed costs don't change with output (rent, insurance, loan repayments). Variable costs change directly with output (raw materials, direct labour).
Total cost (TC) = Fixed costs (FC) + Variable costs (VC) — and TC can never be zero, because fixed costs exist even at zero output.
Average cost (AC) is the cost per unit: TC ÷ Q. It usually falls at first, then eventually rises.
Total revenue (TR) is all the money coming in from sales: Price × Quantity. Average revenue (AR) is just the price per unit — it's the same number as the selling price.
Profit = Total Revenue − Total Cost. If TR = TC, the firm breaks even. If TR < TC, it makes a loss.
As firms grow, they can benefit from economies of scale — falling average costs — thanks to internal factors (bulk buying, specialist managers) or external factors (skilled local workforce, better infrastructure).
Grow too much, though, and diseconomies of scale kick in — average costs start rising again because of things like poor communication and bureaucracy.
The long-run average cost curve is a U-shape: falling (economies of scale) → flattening at the minimum efficient point → rising (diseconomies of scale).

1. Types of Costs

The building blocks — get this right and everything else falls into place.

Fixed Costs (FC)

Think of fixed costs as the bills a business has to pay just to keep the doors open — regardless of whether it sells one item or ten thousand. If a bakery makes 0 loaves of bread this month or 5,000 loaves, the rent on the shop is exactly the same. That's the defining feature: fixed costs don't move when output moves.

Examples: building rent, management/office salaries, insurance premiums, bank loan repayments.
They're only "fixed" in the short run — over a longer period a business could move to a smaller building or renegotiate a loan, but within the period we're analysing, they stay flat.

💡 How to picture it On a graph, fixed cost is a flat horizontal line — it starts at some value above zero (say $200) and never rises, no matter how far right (more output) you go.

Practice Question

A gym pays $3,000/month in rent whether it has 10 members or 500 members. Is this a fixed or variable cost, and why?

Variable Costs (VC)

Variable costs move in lockstep with output. Make more units, and these costs rise; make fewer, and they fall. If our bakery bakes more bread, it needs more flour, more yeast, and more hours from the bakers actually mixing dough — all of that is variable.

Examples: raw materials, wages of workers directly involved in production (not managers).
Total variable cost (TVC) is calculated as: variable cost per unit × quantity produced.

Formula Total Variable Cost (TVC) = Variable Cost per unit (VC) × Quantity (Q)

Formula

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