Eduqas A Level Economics
Eduqas A Level Economics Costs, Revenues and Profits Exam Questions
Free Eduqas A Level Economics revision for Costs, Revenues and Profits: what you need to know, common mistakes and exam-style questions with answers. Covers short and long run costs, economies of scale, revenue, normal and supernormal profit, growth of firms and efficiency.
Practise Costs, Revenues and Profits with past papers
Once you have learnt this topic, find the Costs, Revenues and Profits questions in real Eduqas A Level Economics past papers and mark them with the mark scheme. Doing lots of real questions is the quickest way to learn how examiners ask about each idea.
About Eduqas A Level Economics Costs, Revenues and Profits
Costs, revenues and profits is the Eduqas microeconomics topic that gives you the theory of the firm needed for market structures. It covers short run and long run cost curves, the law of diminishing returns, economies and diseconomies of scale, total, average and marginal revenue, and normal, supernormal and subnormal profit. It also includes the growth of firms (internal and external growth, horizontal, vertical and conglomerate integration) and efficiency, where you must illustrate productive and allocative efficiency and be aware of dynamic and Pareto efficiency. Examiners test cost and revenue calculations in Component 1 and expect cost curve diagrams to be drawn accurately, with MC cutting AC at its minimum.
What you need to know
- Short run costs In the short run at least one factor is fixed. Total cost = fixed cost + variable cost. Average cost = total cost / output. Marginal cost is the change in total cost from producing one more unit. Diminishing marginal returns cause MC and then AVC and ATC to rise.
- Long run costs In the long run all factors are variable. The LRAC curve falls with economies of scale (technical, managerial, financial, purchasing, risk bearing) and rises with diseconomies of scale (communication, coordination, motivation problems). Minimum efficient scale is the lowest output at which LRAC is minimised.
- Revenue Total revenue = price x quantity. Average revenue = TR / Q, which equals price. Marginal revenue is the change in TR from selling one more unit. For a downward sloping demand curve, MR falls twice as steeply as AR.
- Profit Profit = TR - TC. Normal profit is the minimum needed to keep the firm in the industry and is included in costs; supernormal profit is above this. Profit is maximised where MC = MR.
- Growth of firms Firms grow internally (organic growth) or externally through mergers and takeovers. Integration can be horizontal (same stage, same industry), vertical (backward or forward along the supply chain) or conglomerate (unrelated industries). Growth can bring scale economies and market power but also diseconomies and reduced competition.
- Efficiency Productive efficiency is producing at the lowest point of the average cost curve (MC = AC). Allocative efficiency is where price = MC, so resources match consumer preferences. You should be aware of dynamic efficiency (innovation over time) and Pareto efficiency (no one can be made better off without someone being worse off).
Common mistakes in Costs, Revenues and Profits
- Drawing MC cutting AC anywhere. MC must cut AVC and ATC at their minimum points.
- Confusing diminishing returns with diseconomies of scale. Diminishing returns are a short run idea with a fixed factor; diseconomies of scale are a long run idea when all factors vary.
- Saying a firm making zero supernormal profit is making a loss. It is making normal profit, which is enough to keep it in the industry.
- Giving profit maximisation as where MR is at its highest or where TR is at its highest. Profit is maximised where MC = MR; TR is maximised where MR = 0.
- Mixing up vertical and horizontal integration. A car maker buying a tyre supplier is backward vertical integration; buying another car maker is horizontal.
Try three Costs, Revenues and Profits exam-style questions
1. A firm has fixed costs of £400 and variable costs of £6 per unit. Calculate its average total cost when it produces 100 units. (2 marks)
Show the mark scheme answer
TC = 400 + (6 x 100) = £1,000; ATC = 1,000 / 100 = £10 per unit.
2. Explain two economies of scale a large supermarket chain might benefit from. (4 marks)
Show the mark scheme answer
Purchasing (bulk buying) economies: buying in large quantities gives discounts, lowering average cost; financial economies: large firms can borrow more cheaply as they are seen as less risky; (or technical economies from large distribution centres, or managerial specialisation); each linked to lower long run average cost.
3. Distinguish between productive efficiency and allocative efficiency. (4 marks)
Show the mark scheme answer
Productive efficiency: output produced at the lowest possible average cost; where MC = AC at the minimum of the AC curve; allocative efficiency: resources allocated to the goods consumers value most; where price = marginal cost.
Costs, Revenues and Profits FAQs
What does Eduqas A Level Economics Costs, Revenues and Profits cover?
It covers short run and long run costs, economies and diseconomies of scale, revenue, types of profit, the growth of firms through integration, and productive, allocative, dynamic and Pareto efficiency.
Which component is Costs, Revenues and Profits examined in?
It can be tested in Components 1 and 2, often with calculations, and underpins the market structure essays in the Microeconomics section of Component 3.
What formulas should I learn for this topic?
Learn TC = FC + VC, ATC = TC / Q, AVC = VC / Q, MC = change in TC / change in Q, TR = P x Q, AR = TR / Q, profit = TR - TC, and the profit maximising rule MC = MR.
