WJEC Eduqas Eduqas Component 2 2019-style practice: A firm sells 200 units at a price of 15 each. Its total cost is 2,400. Calculate the firm's total revenue, its average cost and its profit.

A short calculate question from data response. Total revenue is price times quantity; average cost is total cost divided by output; profit is total revenue minus total cost. Total revenue: 15 × 200 = 3,000. Average cost: 2,400200 = 12. Profit: 3,000 - 2,400 = 600. Markers reward all three correct figures with units. A neat check: profit per unit is price minus average cost, 15 - 12 = 3, times 200 units, which also gives six hundred pounds.

EnglandEconomicsSyllabus dot point

How do a firm's costs, revenues and profit behave, and how do they drive the profit-maximising output decision?

Costs, revenues and profit: fixed and variable costs, marginal, average and total cost and revenue, the law of diminishing returns, normal and supernormal profit, and the profit-maximising condition.

An Eduqas A520 answer to business costs, revenues and profit, covering fixed and variable costs, the relationship between marginal, average and total measures, the law of diminishing returns, the distinction between normal and supernormal profit, and the profit-maximising rule that marginal revenue equals marginal cost.

Generated by Claude Opus 4.812 min answerUpdated 2026-06-02

Reviewed by: AI editorial process; not yet individually human-reviewed

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Quick answer

Fixed costs do not vary with output (rent, insurance); variable costs rise with output (raw materials, hourly wages). Total cost is fixed plus variable cost; average (unit) cost is total cost divided by output; marginal cost is the cost of one more unit. The law of diminishing returns (a short-run idea) says that as more of a variable factor is added to a fixed factor, the marginal product eventually falls, which is why marginal cost eventually rises and the average cost curve is U-shaped. On the revenue side, total revenue is price times quantity, average revenue equals price, and marginal revenue is the revenue from one more unit. Normal profit is the minimum return needed to keep the firm in the industry (an opportunity cost, included in costs); supernormal (abnormal) profit is any profit above that. A firm maximises profit where marginal cost equals marginal revenue ( $MC = MR$ ).

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What this dot point is asking
Fixed, variable and total costs
The law of diminishing returns and the shape of cost curves
Revenue
Normal and supernormal profit
The profit-maximising condition
Examples in context
Try this

What this dot point is asking

Eduqas wants you to classify costs as fixed or variable, explain the relationship between total, average and marginal cost and revenue, apply the law of diminishing returns, distinguish normal from supernormal profit, and state and use the profit-maximising condition. These cost and revenue curves are the engine of every market-structure diagram that follows, so the definitions and the shapes must be secure.

Fixed, variable and total costs

In the short run at least one factor is fixed; in the long run all factors are variable, so there are no fixed costs. Average fixed cost falls continuously as output rises (the fixed cost is spread over more units, "spreading the overheads"), which is one reason average total cost falls at low output.

The law of diminishing returns and the shape of cost curves

This is distinct from economies of scale, which are a long-run phenomenon and shift the whole average-cost curve; diminishing returns operate in the short run with a fixed factor.

Revenue

For a price-taker (perfect competition) the firm can sell any quantity at the going price, so AR equals MR and both are a horizontal line. For a firm with market power (monopoly, monopolistic competition, oligopoly) the demand curve slopes down, so to sell more the firm must cut price; MR then lies below AR and falls twice as steeply.

Normal and supernormal profit

This distinction is crucial: in long-run perfect competition firms earn only normal profit (supernormal profit attracts entry that competes it away), whereas barriers to entry let a monopoly keep supernormal profit in the long run.

The profit-maximising condition

Finding the profit-maximising output

Step 1: state the data

A firm faces the following marginal values. At 3 units, $MR = \pounds 12$ and $MC = \pounds 6$ . At 4 units, $MR = \pounds 10$ and $MC = \pounds 9$ . At 5 units, $MR = \pounds 8$ and $MC = \pounds 11$ .

Step 2: apply the rule

Compare MR and MC at each unit. At 3 and 4 units, $MR > MC$ , so producing them adds to profit. At 5 units, $MC > MR$ ( $\pounds 11 > \pounds 8$ ), so the fifth unit reduces profit.

Step 3: identify the output

The firm should produce up to and including the fourth unit, where MR ( $\pounds 10$ ) is just above MC ( $\pounds 9$ ) and the next unit would lose money. Profit is maximised at 4 units, the output closest to $MC = MR$ .

Step 4: interpret

Producing fewer than 4 units forgoes profitable output; producing the fifth makes a loss on that unit. The $MC = MR$ rule pins down the profit-maximising quantity regardless of market structure.

Examples in context

Airlines. High fixed costs (aircraft, slots) and low marginal cost per passenger explain heavy discounting to fill the last seats, where price still exceeds marginal cost.
Streaming services. Near-zero marginal cost of an extra subscriber means revenue maximisation and subscriber growth often trump short-run profit.
Manufacturing overheads. Spreading large fixed costs over more units (capacity utilisation) is why factories run flat out to cut average cost.

Try this

Q1. Explain why a firm's average total cost curve is U-shaped in the short run. [4 marks]

Cue. Falling average fixed cost and rising returns pull ATC down at first; the law of diminishing returns raises marginal and then average cost, turning the curve up.

Q2. Distinguish between normal profit and supernormal profit. [3 marks]

Cue. Normal profit = minimum return to stay in the industry (an opportunity cost, in costs); supernormal profit = anything above that, where revenue exceeds total economic cost.

Exam-style practice questions

Practice questions written in the style of WJEC Eduqas exam questions on this dot point, with worked answer explainers. The year tag is the paper they imitate, not the source.

Eduqas Component 2 20194 marksA firm sells 200 units at a price of

\pounds 15

each. Its total cost is

\pounds 2{,}400

. Calculate the firm's total revenue, its average cost and its profit.

Show worked answer →

A short calculate question from data response. Total revenue is price times quantity; average cost is total cost divided by output; profit is total revenue minus total cost.

Total revenue: $\pounds 15 \times 200 = \pounds 3{,}000$ . Average cost: $\frac{2{,}400}{200} = \pounds 12$ . Profit: $\pounds 3{,}000 - \pounds 2{,}400 = \pounds 600$ .

Markers reward all three correct figures with units. A neat check: profit per unit is price minus average cost, $15 - 12 = \pounds 3$ , times 200 units, which also gives six hundred pounds.

Eduqas Component 3 (micro) 202112 marksEvaluate the view that firms always aim to maximise profit by producing where marginal cost equals marginal revenue.

Show worked answer →

A levels-of-response essay. Knowledge and application: state the profit-maximising rule ( $MC = MR$ ) and explain why profit is maximised there (while $MR > MC$ each extra unit adds to profit; beyond it each unit reduces profit). Draw the cost-and-revenue diagram. Distinguish normal profit (the minimum return to keep the firm in the industry, an opportunity cost) from supernormal profit.

Analysis: develop how the rule determines output and the resulting profit.

Evaluation: weigh alternative objectives. Firms may pursue revenue maximisation ( $MR = 0$ ), sales maximisation, market share, or satisficing because of the principal-agent problem (managers, not owners, run large firms). Imperfect information makes exact $MC = MR$ output hard to find. Conclude with a supported judgement, for example that profit maximisation is a useful benchmark but real firms pursue a range of objectives.

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Sources & how we know this

Eduqas A Level Economics Specification (A520) — Eduqas (2015)