Pearson Edexcel · A-Level · Economics B
Course version: 9EB0 · Version from Sept 2015
Quantitative skills: QS 6: calculate cost, revenue and profit (marginal,…
Full specification wording
Appendix 3: Quantitative skills: QS 6: calculate cost, revenue and profit (marginal, average, totals)
Firms analyse financial performance using cost, revenue, and profit metrics.
Checked against the Pearson Edexcel 9EB0 specification (opens in a new tab) on .
- Point 5 of 7
- 4 key terms
Study notes
From the checked teaching notes for this specification point.
The idea
Firms analyse financial performance using cost, revenue, and profit metrics. Total cost (TC) is fixed costs plus variable costs. Average total cost (ATC) is TC divided by quantity (Q). Marginal cost (MC) is the change in TC from producing one extra unit. Total revenue (TR) is price multiplied by Q. Average revenue (AR) is TR divided by Q, which equals price. Marginal revenue (MR) is the change in TR from selling one extra unit. Total profit is TR minus TC. For example, if producing 10 units costs £50 (TC) and selling them generates £80 (TR), total profit is £30. If producing an 11th unit raises TC to £54 and TR to £85, the MC is £4 and the MR is £5. Since MR exceeds MC, producing the 11th unit adds £1 to total profit.
What earns the marks
- Calculate total revenue by multiplying the selling price by the quantity sold.
- Calculate total costs by summing total fixed costs and total variable costs.
- Determine marginal cost or marginal revenue by calculating the difference in total cost or total revenue when output changes by one unit.
- Calculate total profit by subtracting total costs from total revenue.
Common mistakes and how to put them right
Confusing average cost with marginal cost.
Put it right: Average cost is total cost divided by total output, whereas marginal cost is the cost of producing one additional unit.
Assuming profit is maximised where total revenue is highest.
Put it right: Profit is maximised where marginal revenue equals marginal cost, not necessarily where total revenue peaks.
Forgetting to include fixed costs when calculating total costs from variable costs.
Put it right: Add fixed costs to total variable costs to find the total cost before calculating profit.
Exam tips
- Set out your calculations clearly step-by-step, showing the formulas used for totals, averages, and marginals.
- Remember that average revenue is identical to the price of the product in a single-price market.
- Use marginal analysis to explain business decisions, such as whether a firm should increase output.
Try the lesson
The start of the Appendix 3: Quantitative skills: QS 6: calculate cost, revenue and profit (marginal, average, totals) lesson, made from checked teaching notes for this specification point.
Have a go first
A business produces 200 units of a good. The average revenue is £50 per unit and the total cost is £6,000. What is the total profit?
Listen
Firms analyse financial performance using cost, revenue, and profit metrics. Total cost (TC) is fixed costs plus variable costs. Average total cost (ATC) is TC divided by quantity (Q). Marginal cost (MC) is the change in TC from producing one extra unit. Total revenue (TR) is price multiplied by Q. Average revenue (AR) is TR divided by Q, which equals price. Marginal revenue (MR) is the change in TR from selling one extra unit. Total profit is TR minus TC. For example, if producing 10 units costs £50 (TC) and selling them generates £80 (TR), total profit is £30. If producing an 11th unit raises TC to £54 and TR to £85, the MC is £4 and the MR is £5. Since MR exceeds MC, producing the 11th unit adds £1 to total profit. A strong answer earns marks for these points. Calculate total revenue by multiplying the selling price by the quantity sold. Calculate total costs by summing total fixed costs and total variable costs. Determine marginal cost or marginal revenue by calculating the difference in total cost or total revenue when output changes by one unit. Calculate total profit by subtracting total costs from total revenue. A common slip: Confusing average cost with marginal cost. Instead, Average cost is total cost divided by total output, whereas marginal cost is the cost of producing one additional unit. Exam tip: Set out your calculations clearly step-by-step, showing the formulas used for totals, averages, and marginals.
Key words
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Total cost
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Average total cost
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Marginal cost
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Total profit
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See every definition
- Total cost
- Fixed costs plus variable costs, used with total revenue to work out total profit.
- Average total cost
- Total cost divided by quantity, which is different from the cost of producing one additional unit.
- Marginal cost
- The change in total cost from producing one extra unit, compared with marginal revenue when deciding whether to increase output.
- Total profit
- Total revenue minus total cost, which rises when marginal revenue exceeds marginal cost.
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