Microeconomic Decision Makers · 4 question types
Past paper frequency (2018 to 2024)
This topic accounts for approximately 10% of your exam marks.
Fixed vs variable costs, profit calculations, and average cost appear regularly across both Section A and Section B questions.
Profit = Total revenue (TR) − Total cost (TC).
If TR > TC, the firm makes a profit. If TR < TC, the firm makes a loss. If TR = TC, the firm breaks even (normal profit).
Example — a small online retailer sells 500 phone cases at £15 each. Its fixed costs are £1,800 and its variable cost per case is £6. Calculate the firm's profit and its average cost per unit.
Step 1: total revenue
TR = 500 × £15 = £7,500.
Step 2: total cost
TVC = 500 × £6 = £3,000.
TC = TFC + TVC = £1,800 + £3,000 = £4,800.
Step 3: profit
Profit = TR − TC = £7,500 − £4,800 = £2,700.
Step 4: average cost
AC = TC ÷ Q = £4,800 ÷ 500 = £9.60 per case.
Sanity check: AC × Q = £9.60 × 500 = £4,800 = TC. The two routes (AC × Q and TFC + TVC) always give the same total cost. Examiners apply error-carried-forward (ECF) generously here, so always show every step.
Two ways examiners trap candidates on profit calculations:
- Forgetting to add fixed costs to variable costs when computing TC. (Using only TVC overstates profit.)
- Computing profit per unit rather than total profit when the question asks for the latter. Profit = TR − TC (a total). Profit per unit = profit ÷ Q.