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.
Cost is only half the story. The other half is what the firm gets paid.
Total revenue (TR) = the selling price multiplied by the number of units sold. In short form,
TR = P × Q.Average revenue (AR) =
TR ÷ Q. For a firm selling at a single price, this is the same as the price.
At a given price, total revenue rises in proportion to the number of units sold: selling more units raises TR, and selling fewer lowers it. Taking the firm in the worked example above, which charges $8 a unit:
| Units sold (Q) | Total revenue (P × Q) | Average revenue (TR ÷ Q) |
|---|---|---|
| 200 | $1,600 | $8 |
| 250 | $2,000 | $8 |
| 300 | $2,400 | $8 |
Average revenue stays at $8 in every row because a single price is charged, so the whole change in total revenue comes from the change in quantity sold.
One qualifier makes this exam-safe: a firm usually has to lower its price to sell more, so higher sales do not automatically mean higher revenue. Whether the extra units outweigh the lower price depends on the price elasticity of demand for the product (covered in topic 7): if demand is price-elastic a price cut raises total revenue, and if demand is price-inelastic a price cut lowers it.