Pearson Edexcel · A-Level · Economics B
Course version: 9EB0 · Version from Sept 2015
B) Calculation of average, fixed, variable and total costs
Full specification wording
Revenue and costs: b) Calculation of average, fixed, variable and total costs
Costs are the expenses a business incurs during production.
Checked against the Pearson Edexcel 9EB0 specification (opens in a new tab) on .
- Point 2 of 3
- 4 key terms
Study notes
From the checked teaching notes for this specification point.
The idea
Costs are the expenses a business incurs during production. Fixed costs (FC) remain constant regardless of output, such as rent or salaries. Variable costs (VC) change directly with output levels, like raw materials. Total cost (TC) is the sum of fixed and variable costs (TC = FC + VC). Average cost (AC), or unit cost, is the total cost divided by the quantity produced (AC = TC / Q). For example, if a firm produces 1,000 units with fixed costs of £5,000 and variable costs of £3 per unit, total variable costs are £3,000. The total cost is £8,000, making the average cost £8 per unit. Calculating these costs is essential for pricing and profit analysis.
What earns the marks
- Fixed costs do not vary with the level of output in the short run.
- Total variable costs are calculated by multiplying the variable cost per unit by the total output.
- Total cost is the addition of total fixed costs and total variable costs.
- Average cost is calculated by dividing the total cost by the total output (sales volume).
Common mistakes and how to put them right
Confusing total variable costs with variable cost per unit.
Put it right: Total variable cost must be calculated by multiplying the unit variable cost by the quantity produced.
Assuming fixed costs never change.
Put it right: Fixed costs only remain constant in the short run and can change over the long term (e.g., rent increases).
Calculating average cost by dividing only variable costs by output.
Put it right: Average cost must include both fixed and variable costs (Total Cost / Output).
Exam tips
- When given a table of costs, identify which costs are fixed and which are variable before attempting any calculations.
- Remember that as output increases, average fixed costs will fall, which can lower the overall average cost per unit.
- Always state your final answer with the correct currency symbol and check if the question requires rounding to a specific number of decimal places.
Try the lesson
The start of the Revenue and costs: b) Calculation of average, fixed, variable and total costs lesson, made from checked teaching notes for this specification point.
Have a go first
A firm produces 1,000 units of a product. Its total fixed costs are £5,000 and its average variable cost is £10 per unit. What is the firm's total cost?
Listen
Costs are the expenses a business incurs during production. Fixed costs (FC) remain constant regardless of output, such as rent or salaries. Variable costs (VC) change directly with output levels, like raw materials. Total cost (TC) is the sum of fixed and variable costs (TC = FC + VC). Average cost (AC), or unit cost, is the total cost divided by the quantity produced (AC = TC / Q). For example, if a firm produces 1,000 units with fixed costs of £5,000 and variable costs of £3 per unit, total variable costs are £3,000. The total cost is £8,000, making the average cost £8 per unit. Calculating these costs is essential for pricing and profit analysis. A strong answer earns marks for these points. Fixed costs do not vary with the level of output in the short run. Total variable costs are calculated by multiplying the variable cost per unit by the total output. Total cost is the addition of total fixed costs and total variable costs. Average cost is calculated by dividing the total cost by the total output (sales volume). Exam tip: When given a table of costs, identify which costs are fixed and which are variable before attempting any calculations.
Key words
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Fixed costs
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Variable costs
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Total cost
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Average cost
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See every definition
- Fixed costs
- Expenses that remain constant regardless of output in the short run, such as rent or salaries.
- Variable costs
- Costs that change directly with output levels, like raw materials.
- Total cost
- The sum of fixed and variable costs, calculated as TC = FC + VC.
- Average cost
- The total cost divided by the quantity produced, also known as unit cost.
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