Costs & Revenue (CIE IGCSE Economics)

Fixed Cost (FC)

• The firm has to pay its fixed costs which do not change, irrespective if the output is 0 or 100,000 units
• The fixed costs for this firm are $4,000

Variable Cost (VC)

• The variable costs initially rise proportionally with output, as shown in the diagram
• At some point the firm will benefit from a purchasing economy of scale and the rise will no longer be proportional

Total Cost (TC)

• The total cost is the sum of the variable & fixed costs
• The total costs cannot be 0 as all firms have some level of fixed costs

Average Fixed Cost (AFC)

• If the fixed costs of a firm are $1,000 & it produces 1 unit of output, then its AFC is $1,000 ($1,000/1)
• If the firm increases its output to 1000 units, then the AFC is $1 per unit ($1000/1,000)
• The more units a firm produces, the lower its AFC will be
• This is one reasons why large levels of output help to increase the profit per unit

Average Total Cost (AC)

• As a firm grows, it is able to increases its scale of output generating efficiencies that lower its average total costs (AC) of production
• These efficiencies are called economies of scale 
• As a firm continues increasing its scale of output, it will reach a point where its average total costs (AC) will start to increase
• The reasons for the increase in the average costs are called diseconomies of scale

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