Pearson Edexcel · A-Level · Economics B
Course version: 9EB0 · Version from Sept 2015
A) Calculate average cost, average revenue and profit
Full specification wording
Business objectives and pricing decisions: a) Calculate average cost, average revenue and profit
To evaluate a firm's financial performance, economists calculate average cost (AC), average revenue (AR), and profit.
Checked against the Pearson Edexcel 9EB0 specification (opens in a new tab) on .
- Point 1 of 3
- 4 key terms
Study notes
From the checked teaching notes for this specification point.
The idea
To evaluate a firm's financial performance, economists calculate average cost (AC), average revenue (AR), and profit. Average cost is the total cost divided by the quantity produced (AC = TC / Q). For example, if producing 100 units costs £500, the AC is £5. Average revenue is total revenue divided by quantity (AR = TR / Q), which is also the price of the product. If 100 units generate £800, AR is £8. Profit is the difference between total revenue and total cost (Profit = TR - TC). Here, profit is £800 - £500 = £300. Alternatively, profit per unit can be found by subtracting AC from AR (£8 - £5 = £3), and total profit is this unit profit multiplied by the quantity (£3 × 100 = £300). These metrics guide pricing decisions.
What earns the marks
- Average cost is calculated by dividing total cost by the quantity of output.
- Average revenue is calculated by dividing total revenue by the quantity sold, representing the price per unit.
- Total profit is calculated by subtracting total cost from total revenue.
- Profit can also be calculated by finding the profit per unit (average revenue minus average cost) and multiplying by the quantity.
Common mistakes and how to put them right
Confusing total profit with profit margin.
Put it right: Total profit is an absolute monetary value, whereas profit margin is a percentage of revenue.
Forgetting to include fixed costs when calculating average cost.
Put it right: Average cost must include both average fixed and average variable costs.
Assuming average revenue always equals marginal revenue.
Put it right: Average revenue only equals marginal revenue in perfectly competitive markets, not for price makers.
Exam tips
- Always check the units of measurement in the data, such as whether figures are in thousands or millions, before calculating.
- When asked for profit per unit, simply subtract the average cost from the average revenue.
- Write down the formula you are using before substituting the numbers to ensure you do not invert the division.
Try the lesson
The start of the Business objectives and pricing decisions: a) Calculate average cost, average revenue and profit lesson, made from checked teaching notes for this specification point.
Have a go first
A manufacturing business produces 5,000 units of a product. Its total costs are £120,000 and its total sales revenue is £180,000. What are the average cost and average revenue per unit?
Listen
To evaluate a firm's financial performance, economists calculate average cost (AC), average revenue (AR), and profit. Average cost is the total cost divided by the quantity produced (AC = TC / Q). For example, if producing 100 units costs £500, the AC is £5. Average revenue is total revenue divided by quantity (AR = TR / Q), which is also the price of the product. If 100 units generate £800, AR is £8. Profit is the difference between total revenue and total cost (Profit = TR - TC). Here, profit is £800 - £500 = £300. Alternatively, profit per unit can be found by subtracting AC from AR (£8 - £5 = £3), and total profit is this unit profit multiplied by the quantity (£3 × 100 = £300). These metrics guide pricing decisions. A strong answer earns marks for these points. Average cost is calculated by dividing total cost by the quantity of output. Average revenue is calculated by dividing total revenue by the quantity sold, representing the price per unit. Total profit is calculated by subtracting total cost from total revenue. Profit can also be calculated by finding the profit per unit (average revenue minus average cost) and multiplying by the quantity. Exam tip: Always check the units of measurement in the data, such as whether figures are in thousands or millions, before calculating.
See it
Key words
Say what each word means before you turn the card.
Average cost
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Average revenue
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Profit
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Profit per unit
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See every definition
- Average cost
- Total cost divided by the quantity produced, so that producing 100 units at a total cost of £500 gives an average cost of £5.
- Average revenue
- Total revenue divided by quantity, which is also the price of the product.
- Profit
- The difference between total revenue and total cost, found by subtracting total cost from total revenue.
- Profit per unit
- Found by subtracting average cost from average revenue, and multiplied by the quantity to give total profit.
Label the diagram
Some boxes have lost their names. Pick the right name for each number.
1Box 1
2Box 2
3Box 3
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