Economics
Study Notes
Costs Revenues and Profits - Key Terms
- Level:
- A Level
- Board:
- AQA, Edexcel, OCR, IB
Last updated 22 Mar 2021
This study note contains a selection of key terms covering costs, revenues and profits
Average cost | Total cost per unit of output = Total cost / output = TC/Q |
Average cost pricing | Setting prices close to average cost. It is a way to maximise sales, whilst maintaining normal profits. It is sometimes known as sales maximization |
Average fixed cost (AFC) | Total fixed cost per unit of output = TFC/Q |
Average revenue (AR) | Total revenue per unit of output = Price/Output |
Average variable cost | Total variable cost per unit of output = TVC/Q |
Constant returns | When long run average cost remains constant as output increases because output is rising in proportion to the inputs used in the production process |
Consumer surplus | The difference between the total amount that consumers are willing and able to pay for a good or service (indicated by the demand curve) and the total amount that they actually pay (the market price). |
Cost synergies | Cost synergies are the cost savings that a buyer aims to achieve as a result of taking over or merging with another business |
Cost-plus pricing | Where a firm fixes the price for its product by adding a fixed percentage profit margin to the average cost of production. The size of the profit margin may depend on factors including competition and the strength of demand |
Cost-reducing innovations | Cost reducing innovations causing an outward shift in supply. They provide the scope for businesses to enjoy higher profit margins with a given level of demand |
Diminishing returns | Addition of a variable factor to a fixed factor results in a fall in marginal product |
Diseconomies of scale (internal) | A business may expand beyond the optimal size in the long run and experience diseconomies of scale. This leads to rising LRAC |
Dis-synergies | Negative or adverse effects of a takeover or merger. E.g. disruptions that arise from the deal which result additional costs or lower than expected revenues |
Economies of scale | Falling long run average cost as output increases in the long run |
Economies of scope | Where it is cheaper to produce a range of products |
Experience curve | Pattern of falling costs as production of a product or service increases, because the company learns more about it, workers become more skilful |
External diseconomies of scale | When the growth of an industry leads to higher costs for businesses that are part of that industry – for example, increased traffic congestion |
External economies of scale | When the expansion of an industry leads to the development of ancillary services which benefit suppliers in the industry – causing a downward sloping industry supply curve. A business might benefit from external economies by locating in an area in which the industry is already established |
Exit cost | A barrier to exit – the costs associated with a business halting production and leaving a market - linked to the concept of sunk costs |
Fixed cost | Business expense that does not vary directly with the level of output |
Forward vertical integration | Acquiring a business further up in the supply chain – e.g. a vehicle manufacturer buys a car parts distributor |
Marginal cost | The change in total costs from increasing output by one extra unit – the formula for MC is 'change in total cost divided by change in quantity |
Marginal profit | The increase in profit when one more unit is sold or the difference between MR and MC. If MR = £20 and MC = £14 then marginal profit = £6 |
Marginal revenue | The change in total revenue from selling one extra unit of output |
Normal profit | Normal profit is the transfer earnings of the entrepreneur i.e. the minimum reward necessary to keep her in her present industry. The activities of the entrepreneur are independent of the level of output. Normal profit is therefore a fixed cost, included in the average, not the marginal, cost curve |
Profit | The excess of revenue over expenses; or a positive return on an investment. |
Profit margin | The ratio of profit over revenue, expressed as a percentage. Mainly an indication of the ability of a company to control costs |
Profit maximization | Profit maximization occurs when marginal cost = marginal revenue |
Profit per unit | Profit per unit (or the profit margin) = AR – ATC. In markets where demand is price inelastic, a business may be able to raise price well above average cost earning a higher profit margin on each unit sold. In more competitive markets, profit margins will be lower because demand is price elastic |
Shut down price | In the short run the firm will continue to produce as long as total revenue covers total variable costs or put another way, so long as price per unit > or equal to average variable cost (P>AVC) |
Sub-normal profit | Any profit less than normal profit – where price < average cost |
Sunk costs | Sunk costs cannot be recovered if a business decides to leave an industry. The existence of sunk costs makes a market less contestable. |
Supernormal profit | A firm earns supernormal profit when its profit is above that required to keep its resources in their present use in the long run i.e. when price > average cost |
Total cost | Total cost = total fixed cost + total variable cost |
Total revenue | Total revenue (TR) is found by multiplying price (P) by output i.e. number of units sold. Total revenue is maximized when marginal revenue = zero |
Variable cost | Variable costs are business costs that vary directly with output since more variable inputs are required to increase output. Also known as prime costs |
You might also like
Revenues, Costs and Profits (Revision Quizlet Activity)
Quizzes & Activities
Revenues and Profits - Selection of Revision MCQs
Practice Exam Questions
Calculating Total Profit from Diagrams
Student Videos
Theory of the Firm – Key Conditions and Formulae
Student Videos
A* Evaluation on Business Profits
Student Videos
Test 1 - Edge in Economics Revision MC - Revenues and Costs
Student Videos
Business Profits
Student Videos
Profit Satisficing and Profitability Factors
30th January 2014
Recommended

Exam support for 2022
Online Grade Booster Courses for A-Level Exams in May & June 2022
Exam technique, advance information support, live revision and more from the tutor2u subject specialist teams