Cost and Revenue: ISC Class 12 Economics Notes and Producer's Equilibrium
Updated 14 October 2026 · Fact-checked
Cost is the expenditure on inputs to produce output; revenue is the money received from selling it. ISC Class 12 Economics tests cost concepts (explicit, implicit, opportunity, fixed, variable, average and marginal), their curves and relationships, total, average and marginal revenue in different markets, and producer's equilibrium by the TR-TC and MR-MC approaches.
What Cost and Revenue is about
A firm's profit depends on two sides: what it spends (cost) and what it earns (revenue). Economists measure cost more widely than accountants. Explicit costs are actual payments to outsiders (wages, rent, raw materials). Implicit costs are the value of the owner's own resources used in the business (interest he could have earned on his own capital, rent of his own building, salary he could have earned elsewhere). Economic cost = explicit + implicit cost, and opportunity cost is the value of the next best alternative given up.
In the short run some costs are fixed (TFC: rent, interest, salaries of permanent staff) and others variable (TVC: raw materials, wages of casual labour). From these come TC, AFC, AVC, ATC and MC, with standard shapes: TFC horizontal, AFC a rectangular hyperbola that approaches but never touches the axes, AVC, ATC and MC U-shaped, with MC cutting AVC and ATC at their minimum points. The long-run average cost curve is also U-shaped, but because of returns to scale, not the law of variable proportions; derivations are not required.
Revenue concepts (TR, AR, MR) behave differently by market: under perfect competition price is constant, so AR = MR (horizontal) and TR is a straight line from the origin; under imperfect competition AR slopes down and MR lies below AR. Finally, the producer's equilibrium (profit maximisation) is where TR − TC is maximum, or equivalently where MR = MC and MC is rising (cutting MR from below).
Weightage: Cost and Revenue is part of the unit Microeconomic Theory: Market Mechanism, Concepts of Production, Cost and Revenue, which carries 12 of the 80 theory marks, shared with 2 other chapters. Questions on it can appear in any section of the paper.Source: CISCE ISC Economics syllabus, examination year 2027, distribution of marks
Key concepts
- Cost concepts: explicit, implicit, money, real, private, social, opportunity
- Explicit cost: actual money payments to outside factor owners (wages, rent paid, raw materials, electricity).
- Implicit cost: imputed value of self-owned factors (interest on own capital, rent of own premises, salary the owner could earn elsewhere).
- Economic cost = explicit + implicit cost (includes normal profit). Accounting cost records only explicit costs.
- Money cost: total money spent on production; real cost: the pains, efforts and sacrifices of factor owners.
- Private cost: borne by the firm; social cost: borne by society (private cost + external costs such as pollution).
- Opportunity cost (meaning only): the value of the next best alternative forgone when a resource is used for one purpose.
Accounting cost versus opportunity cost: accounting cost is the explicit payment recorded in the books; opportunity cost is the benefit given up from the best alternative use, which may involve no payment at all.
Worked example
Suppose Riya withdraws ₹80,000 from a fixed deposit earning 7% to start a printing shop, and spends ₹50,000 of it on a printer the same day. Identify explicit and implicit costs for the first year. [2 marks]
Try it first, then show the solutionSolution
- Explicit cost: ₹50,000 paid for the printer (and other payments to outsiders).
- Implicit cost: interest forgone on her own ₹80,000 = ₹5,600 a year (not the ₹80,000 itself).
Answer: Explicit ₹50,000 (printer); implicit ₹5,600 (interest forgone).
- Fixed and variable costs (short run)
Total fixed cost (TFC): costs that do not change with output and must be paid even at zero output (rent, interest on loans, insurance, salaries of permanent staff, depreciation by time). TFC curve: a horizontal straight line parallel to the X-axis.
Fixed cost is a short-run phenomenon: in the short run there is not enough time to change fixed factors (plant, building); in the long run all factors, and so all costs, are variable.
Total variable cost (TVC): costs that change with output (raw materials, power, wages of casual labour); zero at zero output. TVC is an avoidable cost: if the firm stops producing, it does not incur it. The TVC curve starts from the origin, rises at a diminishing rate and then at an increasing rate (reflecting the law of variable proportions).
Total cost (TC) = TFC + TVC; the TC curve starts from the level of TFC on the Y-axis and has the same shape as TVC (vertical gap = TFC).
Worked example
Suppose a statement says "TVC is an avoidable cost". Is it true or false? Give a reason. [1 mark]
Try it first, then show the solutionSolution
- TVC depends on output; at zero output TVC is zero, so the firm can avoid it by shutting down temporarily.
Answer: True: TVC is incurred only when output is produced.
- Average and marginal costs and their relationships
- AFC = TFC ÷ Q: falls continuously as output rises; its curve is a rectangular hyperbola (AFC × Q = constant TFC) and is asymptotic to both axes: it approaches but never touches them.
- AVC = TVC ÷ Q and ATC (AC) = TC ÷ Q = AFC + AVC: both U-shaped (law of variable proportions).
- MC = TCn − TCn−1 = TVCn − TVCn−1 (fixed cost does not affect MC): U-shaped.
Relationships:
- When MC < AC, AC falls; when MC = AC, AC is minimum; when MC > AC, AC rises. The same holds for MC and AVC.
- MC cuts AVC and then ATC at their minimum points, from below.
- The gap between ATC and AVC (= AFC) narrows as output rises but never disappears.
- Minimum AVC is reached at a lower output than minimum ATC.
Worked example
Suppose TFC = ₹60 and TVC for outputs 1 to 5 is ₹40, 70, 90, 120 and 170. Complete the cost schedule. [3 marks]
Output TFC TVC TC MC AFC AVC ATC 0 60 0 60 — — — — 1 60 40 100 40 60 40 100 2 60 70 130 30 30 35 65 3 60 90 150 20 20 30 50 4 60 120 180 30 15 30 45 5 60 170 230 50 12 34 46 Try it first, then show the solutionSolution
- TC = TFC + TVC; MC = change in TC; AFC = 60/Q; AVC = TVC/Q; ATC = TC/Q.
- MC is lowest (20) at 3 units and then rises; AVC is minimum (30) at 3-4 units where MC = AVC; ATC is minimum (45) at 4 units.
Answer: As tabulated: MC falls then rises and cuts AVC and ATC near their minimum points.
- Short-run and long-run cost curves (concepts only)
Short-run cost curves (SAC, SMC) are U-shaped because of the law of variable proportions: increasing returns to the variable factor lower average cost at first; diminishing returns raise it later.
Long-run average cost (LAC): in the long run all factors are variable, so the firm chooses the plant size that gives the lowest cost for each output. LAC is also U-shaped, but because of returns to scale (economies of scale lower cost at first; diseconomies raise it at large scale). LAC is flatter than SAC curves and is sometimes called the envelope or planning curve.
So the statement "LAC is U-shaped because of the law of variable proportions" is to be refuted: that law operates only in the short run.
Worked example
A student says the long-run average cost curve falls and then rises for the same reason as the short-run curve. Defend or refute. [1 mark]
Try it first, then show the solutionSolution
- The law of variable proportions needs a fixed factor (short run); in the long run all factors vary.
Answer: Refute: LAC is U-shaped because of increasing and then diminishing returns to scale (economies and diseconomies of scale).
- Revenue: TR, AR and MR in perfect and imperfect competition
- Total revenue (TR) = P × Q.
- Average revenue (AR) = TR ÷ Q = price. The AR curve is the firm's demand curve.
- Marginal revenue (MR) = TRn − TRn−1.
Perfect competition (price taker): price is constant, so AR = MR = price; both are one horizontal line. TR is a straight line from the origin, rising at a constant rate.
Imperfect competition (monopoly, monopolistic competition): to sell more the firm must lower price, so AR slopes downwards and MR < AR (MR falls faster, and for a straight-line AR, MR has twice the slope). TR rises at a diminishing rate, is maximum when MR = 0, and falls when MR is negative.
AR-MR relationship (imperfect competition): AR > MR after the first unit, because the price cut applies to all units sold, not only the extra one.
Worked example
Suppose a firm's schedule is as below. Explain the relation between AR and MR with a reason. [2 marks]
Units AR = Price (₹) TR (₹) MR (₹) 1 18 18 18 2 16 32 14 3 14 42 10 4 12 48 6 Try it first, then show the solutionSolution
- AR falls (18 → 12) and MR falls faster (18 → 6); MR < AR from the 2nd unit.
- To sell one more unit the firm cuts the price on all units, so the addition to TR (MR) is less than the price (AR).
Answer: Imperfect competition: both fall, MR below AR, because price falls on all units sold.
- Producer's equilibrium: TR-TC and MR-MC approaches
Producer's equilibrium is the output at which the firm earns maximum profit (or minimum loss) and has no incentive to change output.
(a) TR-TC approach: profit = TR − TC; equilibrium where the vertical gap TR − TC is maximum (TR above TC). In the diagram, the slope of TC equals the slope of TR at that output.
(b) MR-MC approach: two conditions:
1. MR = MC.
2. MC is rising at that output (MC cuts MR from below).If MR > MC, producing more adds to profit; if MR < MC, producing less adds to profit. Where MC cuts MR from above (falling MC), profit is not maximum.
Under perfect competition: P = MR = MC with MC rising. Break-even point: P = minimum ATC (normal profit). Shut-down point: P = minimum AVC (the firm just covers variable cost; below it, it stops production in the short run).
Worked example
Suppose the firm with the cost schedule above sells at a market price of ₹50. Find its equilibrium output and profit. [2 marks]
Try it first, then show the solutionSolution
- MR = ₹50. MC rises to 50 at the 5th unit (MC = MR, MC rising).
- TR = 5 × 50 = ₹250; TC = ₹230; profit = ₹20 (ATC 46 < price 50).
Answer: 5 units; profit ₹20.
Cost and Revenue in real life
Each concept, met in an everyday situation. Read the situation, answer the question in your own words, then compare with the model answer. The one-line hook is what to remember.
Implicit cost of your own shop
Suppose a family runs a grocery store in a room they own, which could be rented out for ₹15,000 a month.
Is the ₹15,000 a cost for the business even though no rent is paid?
Try it first, then show the solutionSolution
- It is the income given up by using the room for the shop: an implicit cost (opportunity cost).
- Economic profit is calculated after deducting it; accounting profit ignores it.
Answer: Yes: an implicit cost of ₹15,000 a month.
Memory hook: Free to use is not free.
Spreading fixed cost
Imagine a coaching centre that pays ₹60,000 a month rent whether it teaches 20 students or 200.
What happens to fixed cost per student as enrolment rises?
Try it first, then show the solutionSolution
- AFC = 60,000 ÷ students: ₹3,000 at 20, ₹300 at 200.
- AFC keeps falling but never reaches zero: a rectangular hyperbola.
Answer: AFC falls continuously but never becomes zero.
Memory hook: Same rent, more heads, smaller share.
Shut-down point
Suppose a seasonal ice-cream factory finds that the winter price just covers its milk, sugar and wages (variable costs) but not its rent.
Should it continue producing in the short run?
Try it first, then show the solutionSolution
- If it shuts, it still pays rent (fixed cost) and loses the whole of it.
- At P = minimum AVC it is indifferent; below it, it should shut down; above it, it should continue as part of the fixed cost is covered.
Answer: At exactly P = min AVC it is at the shut-down point; it continues only if price is above AVC.
Memory hook: Cover the variable cost, or switch off the machines.
Topics in this chapter
Cost and Revenue: key facts
- Total cost
- TC = TFC + TVC
- Average costs
- AFC = TFC/Q; AVC = TVC/Q; ATC = TC/Q = AFC + AVC
- Marginal cost
- MCn = TCn − TCn−1 = TVCn − TVCn−1
- Revenue
- TR = P × Q; AR = TR/Q = P; MRn = TRn − TRn−1
- Profit
- Profit = TR − TC
- Producer's equilibrium
- MR = MC and MC rising (cuts MR from below)
How the board asks Cost and Revenue
The question patterns to expect, and the method that works for each.
| Question type | How it is asked | Method |
|---|---|---|
| Objective (Q1) | Identify shut-down or break-even point in a diagram ("incorrect" statement); defend or refute on LAC; explicit and implicit cost from a situation; true/false on TVC. | Read negatives; give the reason in economic terms. |
| Short answer (Section B) | AFC or TFC curve with explanation; TR under perfect versus imperfect competition; AR-MR relation from a schedule. | Use terms like rectangular hyperbola, asymptotic, horizontal; study the given schedule. |
| Long answer (Section C) | Producer's equilibrium by TR-TC and MR-MC with diagrams; cost relationships. | State both conditions; diagram with the equilibrium output marked. |
Tricks to remember Cost and Revenue
Short memory aids. Say each one aloud once, then use it on a question the same day.
MC leads AC
MC below AC pulls AC down; MC above pulls it up; MC passes through the bottom of AC.
Use it when: AC-MC relationship.
Two conditions, one profit
MR = MC and MC rising: equal and from below.
Use it when: Producer's equilibrium.
Break-even vs shut-down
Break-even: P = min ATC (all costs covered). Shut-down: P = min AVC (only variable costs covered).
Use it when: Diagram MCQs.
Cost and Revenue: board-level solved questions
Ordered from board level to HOTS. Cover the solution, write your own, then compare step by step.
Example 1: Identify the incorrect statement · 1 mark · MCQBoard level
In a perfect competition diagram, the price line touches ATC at its minimum point E, and MC cuts AVC at its minimum point C below E. Which statement is INCORRECT?
(a) E is the equilibrium point
(b) The firm earns normal profit
(c) E is the shut-down point
(d) E is the break-even point
Try it first, then show the solutionSolution
- At E, P = min ATC: break-even, normal profit, equilibrium. The shut-down point is C, where P would equal min AVC.
Answer: (c)
Example 2: Explicit and implicit cost · 1 mark · Very short answerHarder board level
Kabir uses ₹1,00,000 of his savings (which earned 6%) to start a business and pays ₹40,000 for a laptop the same day. Identify the explicit and implicit costs for a year.
Try it first, then show the solutionSolution
- Explicit: ₹40,000 paid for the laptop.
- Implicit: interest forgone = ₹6,000.
Answer: Explicit ₹40,000; implicit ₹6,000.
Example 3: AFC curve · 2 marks · Short answerBoard level
Draw (describe) and explain the shape of the average fixed cost curve.
Try it first, then show the solutionSolution
- AFC = TFC ÷ Q falls as output rises because a constant TFC is spread over more units.
- Since AFC × Q is constant, the curve is a rectangular hyperbola, asymptotic to both axes: it approaches but never touches them.
Answer: A downward-sloping rectangular hyperbola that never touches either axis.
Example 4: TR under perfect and imperfect competition · 2 marks · Short answerHarder board level
Give two differences between the TR curve under perfect competition and under imperfect competition.
Try it first, then show the solutionSolution
- Perfect: TR is a straight line from the origin (constant MR = price); imperfect: TR rises at a diminishing rate (falling MR).
- Perfect: TR keeps rising with output; imperfect: TR reaches a maximum when MR = 0 and then falls.
Answer: Shape (straight line vs curve) and behaviour (always rising vs maximum then falling).
Example 5: Why fixed cost is short run · 2 marks · Short answerHarder board level
Why is fixed cost a short-run phenomenon? Describe the TFC curve.
Try it first, then show the solutionSolution
- In the short run there is not enough time to change fixed factors such as plant and building, so their cost stays fixed; in the long run all factors can be changed, so all costs become variable.
- TFC curve: horizontal straight line parallel to the X-axis, starting from a positive point on the Y-axis.
Answer: Fixed factors cannot be varied in the short run; TFC is a horizontal line.
Example 6: Producer's equilibrium with both approaches · 6 marks · Long answerHOTS / competency
Using the cost schedule (TFC ₹60; TVC ₹40, 70, 90, 120, 170 for 1 to 5 units) and a price of ₹50, find the equilibrium output by the TR-TC approach and confirm it by the MR-MC approach. Explain why the firm would not stop at 3 units, where MC is lowest.
Try it first, then show the solutionSolution
- TR: 50, 100, 150, 200, 250. TC: 100, 130, 150, 180, 230. Profit: −50, −30, 0, 20, 20.
- TR-TC: profit is maximum (₹20) at 4 and 5 units; the MR-MC rule picks the larger output where MC rises to equal MR.
- MR-MC: MR = 50 for every unit; MC = 40, 30, 20, 30, 50. MC = MR = 50 at the 5th unit, with MC rising.
- At 3 units MR (50) > MC (20): producing more adds to profit, so the firm expands.
Answer: Equilibrium output 5 units; profit ₹20.
Case-study practice (Section C style)
Read the situation, then answer every part. In the board paper this is a 8-mark question split into 2 + 2 + 2 + 2 marks.
A tiffin service
Suppose Neha runs a tiffin service from her own kitchen. She pays ₹8,000 a month for a delivery scooter on lease and ₹2,000 for gas cylinders (fixed). Ingredients and the helper's daily wages cost ₹60 per tiffin. She sells tiffins at ₹100 each. Her kitchen could be rented out for ₹6,000 a month.
(i) · 2 marks
Classify the costs into fixed and variable, explicit and implicit.
Answer
Answer: Fixed explicit: scooter lease ₹8,000, gas ₹2,000. Variable explicit: ₹60 per tiffin. Implicit: kitchen rent forgone ₹6,000.
1 mark each classification.
(ii) · 2 marks
How many tiffins must she sell a month to cover explicit costs?
Answer
Answer: Contribution per tiffin = 100 − 60 = ₹40; fixed explicit ₹10,000 ÷ 40 = 250 tiffins.
1 mark contribution, 1 mark answer.
(iii) · 2 marks
How many to cover economic cost (including implicit cost)?
Answer
Answer: (10,000 + 6,000) ÷ 40 = 400 tiffins.
2 marks.
(iv) · 2 marks
What is her MR per tiffin and what market form does it suggest?
Answer
Answer: MR = AR = ₹100 if she can sell any number at the same price: close to perfect competition (price taker).
1 mark each.
Where the marks are
How a typical answer is split into step marks. Show every step: a right final answer alone rarely earns full marks.
AFC curve (2 marks) (2 marks)
| Step | Marks |
|---|---|
| Correct diagram (rectangular hyperbola not touching axes) | 1 |
| Explanation with terms "rectangular hyperbola" and "asymptotic" | 1 |
Cost schedule completion and relationships (4 marks) (4 marks)
| Step | Marks |
|---|---|
| TC and MC columns | 1 |
| AFC, AVC, ATC columns | 1 |
| MC-AC relationship identified in the schedule | 1 |
| Minimum points identified | 1 |
Producer's equilibrium by two approaches (6 marks) (6 marks)
| Step | Marks |
|---|---|
| TR, TC and profit at each output | 2 |
| Equilibrium output by TR-TC | 1 |
| MR = MC with MC rising | 2 |
| Explanation of why lower output is not equilibrium | 1 |
Where students lose marks in Cost and Revenue
The slips examiners see most often, and what to write instead.
Mistake: Confusing break-even and shut-down points
CISCE examiners' comments, 2024: "Chose point E (break-even point) as the shutdown point instead of point C"; "Overlooked the word 'incorrect' in the question".
Do this: Break-even: P = min ATC; shut-down: P = min AVC. Underline "incorrect".
Usually costs: 1 mark.
Mistake: Wrong reason for the U-shaped LAC
CISCE examiners' comments, 2025: "Gave the Law of Variable Proportions as the reason for the U-shaped LAC curve"; "Refuted the statement without stating a reason".
Do this: Refute and cite returns to scale (economies and diseconomies of scale).
Usually costs: 1 mark.
Mistake: Implicit cost taken as the whole investment
CISCE examiners' comments, 2025: "Reversed explicit and implicit costs"; "Treated the entire ₹50,000 as implicit cost instead of the interest foregone on it".
Do this: Implicit cost of own capital = interest forgone, not the capital itself.
Usually costs: 1 mark.
Mistake: Wrong shape or wrong curve for fixed costs
CISCE examiners' comments, 2025: "Drew an upward sloping TFC curve"; "Drew an AFC curve instead of TFC"; CISCE examiners' comments, 2024: "terms 'rectangular hyperbola' and 'asymptotic' not mentioned".
Do this: TFC: horizontal; AFC: rectangular hyperbola, asymptotic to both axes.
Usually costs: 1 mark.
Mistake: Not reading the revenue schedule
CISCE examiners' comments, 2025: "Gave the general relation among TR, AR and MR instead of studying the schedule"; "Mentioned only that curves are negatively sloped without stating AR > MR or giving the reason".
Do this: Quote figures from the schedule; state AR > MR and why.
Usually costs: 1 mark.
Practice questions on Cost and Revenue
Write each answer on paper first. Open the hint only if you are stuck, and the answer only when you have finished.
Q1 · 1 mark · MCQBoard level
The AFC curve is:
(a) U-shaped
(b) a horizontal line
(c) a rectangular hyperbola
(d) a vertical lineHint
TFC spread over Q.
Answer
(c)
Q2 · 1 mark · Very short answerBoard level
Define opportunity cost.
Hint
Next best.
Answer
The value of the next best alternative forgone when a resource is put to a particular use.
Q3 · 2 marks · Short answerHarder board level
TC at 6 units is ₹300 and at 7 units ₹345. TFC is ₹90. Find MC of the 7th unit and AVC at 7 units.
Hint
TVC = TC − TFC.
Answer
MC = ₹45; TVC = 255; AVC = 255 ÷ 7 = ₹36.43.
Q4 · 2 marks · Short answerBoard level
State the relationship between MC and AC.
Hint
Three cases.
Answer
MC < AC: AC falls; MC = AC: AC minimum; MC > AC: AC rises.
Q5 · 1 mark · Very short answerHarder board level
When is TR maximum under imperfect competition?
Hint
MR sign.
Answer
When MR = 0.
Q6 · 2 marks · Short answerHOTS / competency
Why must MC cut MR from below for profit to be maximum?
Hint
What happens after.
Answer
If MC is falling where it equals MR, MR exceeds MC for the next units, so producing more raises profit; equilibrium needs MC rising so that further output reduces profit.
Q7 · 2 marks · Short answerHarder board level
Distinguish between private cost and social cost with an example.
Hint
Pollution.
Answer
Private cost is borne by the firm (wages, fuel); social cost adds costs borne by others, such as health damage from a factory's smoke.
Q8 · 2 marks · Short answerHOTS / competency
At an output of 10 units, ATC is ₹25 and AVC ₹18. Find TFC.
Hint
AFC × Q.
Answer
AFC = 25 − 18 = ₹7; TFC = 7 × 10 = ₹70.
Test your recall
Answer in your head or on paper first, then open the card. Pulling an answer out of memory makes it stick far better than re-reading.
1.Shape of TFC?Show answer
Horizontal straight line.
2.MC cuts AVC and ATC where?Show answer
At their minimum points.
3.AR = MR under which market?Show answer
Perfect competition.
4.Two conditions of producer's equilibrium?Show answer
MR = MC; MC rising (cuts MR from below).
Best order to study it
- Cost concepts: explicit, implicit, opportunity, private, social.
- TFC, TVC, TC and their curves.
- AFC, AVC, ATC, MC and relationships.
- Short-run and long-run cost curves (concepts).
- TR, AR, MR in perfect and imperfect competition.
- Producer's equilibrium: TR-TC and MR-MC.
Quick revision checklist
The night before the exam: can you do each of these without looking?
- Economic cost = explicit + implicit.
- TC = TFC + TVC; MC unaffected by TFC.
- AFC: rectangular hyperbola; AVC, ATC, MC: U-shaped.
- LAC U-shaped due to returns to scale.
- Perfect competition: AR = MR = P; imperfect: MR < AR.
- Equilibrium: MR = MC with MC rising.
Cost and Revenue: frequently asked questions
Do I need to derive long-run cost curves?
No. The syllabus requires only the concepts of short-run and long-run cost curves; derivations are excluded.
Is opportunity cost tested with numericals?
The syllabus asks for its meaning only, along with the difference between accounting cost and opportunity cost.
Why is MC not affected by fixed cost?
Fixed cost does not change with output, so the change in total cost from one more unit equals the change in variable cost.
Based on: CISCE ISC 2027 Economics syllabus; CISCE ISC 2027 Economics specimen question paper and answer key; CISCE Analysis of Pupil Performance, ISC Economics, 2025; CISCE Analysis of Pupil Performance, ISC Economics, 2024