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Costs, revenue and profit
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Businesses need to know their costs and revenue to work out profit. Average cost shows the cost of each unit.
Costs
Total fixed costs (TFC): do not change with output, such as rent.
Total variable costs (TVC): change with output, such as raw materials.
Total costs (TC) = TFC + TVC
Average (total) cost (AC) = total costs ÷ output
Total variable costs (TVC): change with output, such as raw materials.
Total costs (TC) = TFC + TVC
Average (total) cost (AC) = total costs ÷ output
Revenue and profit
Total revenue (TR) = price × quantity sold
Profit = total revenue − total costs
A negative profit is a loss.
Profit = total revenue − total costs
A negative profit is a loss.
An example
A firm sells 300 units at £12. TFC is £1000 and variable cost is £5 per unit. Find the profit.
- TR = 300 × 12 = £3600
- TC = 1000 + 300 × 5 = £2500
- Profit = 3600 − 2500
Answer: £1100
TC = TFC + TVC. AC = TC ÷ output. TR = price × quantity. Profit = TR − TC. Average cost often falls as output rises because fixed costs are spread.
The interactive lesson includes the diagrams for this topic.
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