Cambridge Syllabus Notes

Microeconomic Decision‑Makers – Firms

Firms are the main players in the market. They decide what to produce, how much to produce, and at what price to sell. Their goal is usually to maximise profit, but they also consider costs, revenue, and market conditions.

Key Economic Concepts for Firms

Profit (π) = Total Revenue (TR) – Total Cost (TC). π = TR - TC
Revenue = Price (P) × Quantity (Q). TR = P × Q
Cost = Fixed Costs (FC) + Variable Costs (VC). TC = FC + VC
Average Cost (AC) = Total Cost ÷ Quantity. AC = TC ÷ Q
Marginal Cost (MC) = Change in Total Cost ÷ Change in Quantity. MC = ΔTC ÷ ΔQ

A firm will produce where Marginal Cost = Marginal Revenue (MR) to maximise profit. In perfect competition, MR equals the market price.

Primary, Secondary & Tertiary Sectors – What They Do

Sector	Main Activity	Example Firms
Primary	Extracting or harvesting natural resources.	🌱 Farmers, 🏭 Mining companies, 🌊 Fishing fleets.
Secondary	Transforming raw materials into finished goods.	🏭 Car manufacturers, 🏗️ Construction firms, 🧶 Textile mills.
Tertiary	Providing services to consumers and businesses.	🛍️ Retail stores, 🏥 Hospitals, 💻 IT support.

Analogy: Think of the economy as a factory line. The primary sector is the raw material supplier (like a farmer bringing apples). The secondary sector is the factory that turns apples into apple juice. The tertiary sector is the shop that sells the juice to you. Each step adds value.

How Firms Decide in Each Sector

Primary Firms: Focus on resource extraction costs and market prices for raw goods. Example: A coal mine decides how many tons to extract based on coal price and extraction cost.
Secondary Firms: Balance production costs (raw material, labour, energy) against selling price of finished goods. Example: A car factory calculates if producing 1,000 cars will cover its costs and yield profit.
Tertiary Firms: Aim to provide value-added services at a price that covers service costs (labour, technology). Example: A bank offers loans at interest rates that cover operating costs and provide profit.

Exam Tip: When asked to explain the difference between the three sectors, use the factory line analogy and give one real‑world example for each. This shows you understand both the concept and its application.

Profit Maximisation in Practice

A firm will keep increasing output as long as Marginal Revenue (MR) ≥ Marginal Cost (MC). Once MR < MC, it stops producing more because each additional unit would reduce profit.

In a perfectly competitive market, MR equals the market price (P). Therefore, firms produce where MC = P. If the price is higher than the average total cost (ATC), the firm earns a profit.

Quick Check:

What is the formula for profit? π = TR - TC
When does a firm maximise profit? MC = MR
In perfect competition, what is MR? MR = P

Key Take‑aways for the Exam

Define primary, secondary, tertiary sectors and give at least one example of each.
Explain how a firm decides the quantity to produce using MC = MR.
Show the relationship between profit, revenue, and cost with the appropriate formulas.
Use the factory line analogy to illustrate the flow of value creation.
Remember that primary firms focus on resource extraction, secondary firms on manufacturing, and tertiary firms on services.

Final Exam Tip: Practice drawing simple supply curves for each sector and label where MC intersects the market price. This visual aid often helps you answer questions about output decisions quickly.

Primary/secondary/tertiary sector firms