WJEC A Level Economics
WJEC A Level Economics Costs, Revenues and Profits Exam Questions
Free WJEC 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, diminishing returns, economies of scale, revenue, profit, growth of firms and types of efficiency.
Practise Costs, Revenues and Profits with past papers
Once you have learnt this topic, find the Costs, Revenues and Profits questions in real WJEC 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 WJEC A Level Economics Costs, Revenues and Profits
Costs, revenues and profits is the first A2 microeconomics topic in WJEC Economics and gives you the tools for the theory of the firm. You learn short run cost curves and the law of diminishing returns, long run average cost with economies and diseconomies of scale, average and marginal revenue, and the types of profit including the profit maximising rule. The topic also covers the growth of firms through internal growth, mergers and integration, and efficiency: productive and allocative efficiency with diagrams, and awareness of dynamic and Pareto efficiency. This content is examined in A2 Units 3 and 4 and is essential for analysing market structures.
What you need to know
- Short run costs and diminishing returns With one fixed factor, adding more of a variable factor eventually gives smaller increases in output. This causes marginal cost to rise, pulling up AVC and ATC, which gives U shaped short run cost curves.
- Long run costs LRAC falls as output grows due to internal economies of scale such as technical, purchasing, financial, managerial and risk bearing economies. It rises when diseconomies set in, such as poor communication and coordination. External economies shift the whole LRAC down.
- Revenue TR = P x Q; AR = TR / Q = price; MR = ΔTR / ΔQ. A price taker has AR = MR; a firm facing a downward sloping demand curve has MR below AR.
- Profit Profit = TR - TC. Normal profit is the minimum return to keep the firm in the industry; supernormal profit is anything above it. Profit maximisation occurs at MC = MR, and a firm should shut down in the short run if price falls below AVC.
- Growth of firms Firms grow organically or by merger and takeover. Horizontal, vertical (backward or forward) and conglomerate integration have different motives, such as market power, control of supply, economies of scale and spreading risk.
- Efficiency Productive efficiency is producing at minimum average cost; allocative efficiency is where price equals marginal cost. Dynamic efficiency is improvement over time through investment and innovation; Pareto efficiency is where no one can be made better off without making someone worse off.
Common mistakes in Costs, Revenues and Profits
- Explaining U shaped short run AC curves with economies of scale. In the short run the cause is diminishing marginal returns.
- Saying a loss making firm should close immediately. In the short run it should continue if price covers average variable cost.
- Drawing MR equal to AR for a monopolist. For a downward sloping demand curve MR lies below AR.
- Confusing internal and external economies of scale. Internal economies come from the firm's own growth; external economies come from growth of the industry, for example a local skilled workforce.
- Assuming mergers always benefit consumers. Market power may raise prices, so evaluate with competition concerns and diseconomies of scale.
Try three Costs, Revenues and Profits exam-style questions
1. A firm sells 500 units at £12 each. Its total costs are £5,200. Calculate its profit and average total cost. (3 marks)
Show the mark scheme answer
TR = 500 x 12 = £6,000; profit = 6,000 - 5,200 = £800; ATC = 5,200 / 500 = £10.40.
2. Explain the difference between backward vertical integration and horizontal integration. (4 marks)
Show the mark scheme answer
Backward vertical integration is when a firm merges with a supplier at an earlier stage of production, e.g. a chocolate maker buying a cocoa farm; it secures supplies and cuts costs; horizontal integration is a merger of firms at the same stage in the same industry, e.g. two supermarkets; it increases market share and economies of scale.
3. Explain why dynamic efficiency may be more important than static efficiency for consumers in the long run. (4 marks)
Show the mark scheme answer
Dynamic efficiency comes from investment in new technology and products over time; this can lower costs and improve quality; benefits may outweigh short term allocative inefficiency; e.g. supernormal profits fund research and development.
Costs, Revenues and Profits FAQs
What does WJEC A Level Economics Costs, Revenues and Profits cover?
It covers short and long run costs, diminishing returns, economies and diseconomies of scale, revenue and profit, the growth of firms and integration, and productive, allocative, dynamic and Pareto efficiency.
Which unit is Costs, Revenues and Profits examined in?
It is A2 content, so it is examined in A2 Unit 3 (Exploring Economic Behaviour) and A2 Unit 4 (Evaluating Economic Models and Policies).
What diagrams should I learn for this topic?
Learn short run MC, AVC and ATC curves (with MC cutting both at their minimum), the LRAC curve with economies and diseconomies of scale, and AR and MR for both a price taker and a price maker.
