Key Idea: Topic 3.3 is about understanding costs, revenue and profit and how they connect. At HL, students are expected to handle these ideas more precisely, interpret what changes in costs or revenue mean for performance, and avoid confusing revenue, profit and cash.
Core formulas
- Revenue — price × quantity sold
- Total cost — fixed costs + variable costs
- Profit — revenue − total cost
- Average cost — total cost ÷ output
- Higher output may lower average cost if fixed costs are spread more widely
📊 Types of costs: **Fixed costs —** do not change with output. **Variable costs —** change with output. **Semi-variable costs —** partly fixed, partly variable. **Direct costs —** linked directly to production. **Indirect costs —** not directly linked.
💰 Revenue: **Revenue —** income from sales. **Higher price —** may increase revenue. **Higher demand —** increases revenue. **Lower demand —** reduces revenue. **Revenue is not the same as profit**.
Core relationships
- Increase in costs — reduces profit if revenue does not rise too
- Decrease in costs — increases profit if revenue is unchanged
- Increase in price — may increase revenue, but demand may fall
- Decrease in price — may raise volume sold but reduce profit per unit
- Wages can be fixed or variable depending on the payment system
High-yield HL expectations
- Gross profit and net profit are not the same
- High sales revenue does not guarantee high profit
- Multi-product businesses may have several revenue streams
- Different cost structures change business risk and flexibility
- HL answers should explain not just what changed, but why that matters for the business
Profit depends on both costs and revenue.
HL exam tip: when analysing a change in price, demand or cost, always explain the likely effect on profit, not just on revenue or output.
Past-paper tip: markschemes reward precision with cost language. Do not confuse fixed cost with fixed asset, and do not assume all labour costs are variable.
Important: Common trap: higher price does not always mean higher profit — demand matters.
- Use the correct formula
- Show working if needed
- Explain the effect on revenue, cost or profit
- Apply to the business
- Where possible, explain the trade-off, not just the direction of change