Firms' Costs, Revenue & Objectives
Microeconomic Decision Makers · 5 question types
Exam Frequency Analysis
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.
Several derived costs follow from FC and VC.
| Concept | Formula |
|---|---|
| Total variable cost (TVC) | Variable cost per unit × Quantity (Q) |
| Total cost (TC) | Total fixed cost (TFC) + Total variable cost (TVC) |
| Average fixed cost (AFC) | TFC ÷ Q |
| Average variable cost (AVC) | TVC ÷ Q |
| Average total cost (ATC) | TC ÷ Q (also AFC + AVC) |
Average total cost is sometimes written AC (average cost) instead of ATC. The two mean exactly the same thing, and both abbreviations are recognised in exam answers.
Because a fixed total is spread over more and more units, average fixed cost falls continuously as output rises, steeply at first and then flattening out. This is one reason a firm's average total cost (ATC) tends to fall as it produces more.
Calculating TC, ATC, TR and profit from a data set
A firm has fixed costs of $800 per week. It produces 200 units, with a variable cost of $3 per unit. It sells every unit at a price of $8.
Solution:
- Total variable cost (TVC) = $3 × 200 = $600
- Total cost (TC) = TFC + TVC = $800 + $600 = $1,400
- Average total cost (ATC) = TC ÷ Q = $1,400 ÷ 200 = $7 per unit
- Total revenue (TR) = price × quantity sold = $8 × 200 = $1,600
- Profit = TR − TC = $1,600 − $1,400 = $200 profit