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.
📊 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**.
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