How do you show profit and loss on a cost and revenue diagram?

Profit is defined as the difference between total revenue and total costs, where a firm is profitable whenever TR exceeds TC. When a firm experiences a fall in costs — for example, because investment in new technology lowers its average and total costs — the TC curve shifts downward on a cost and revenue diagram. This means that at every level of output, the vertical gap between TR and TC widens. As a result, the maximum profit point, found where the distance between TR and TC is greatest, increases. For instance, if a firm such as a car manufacturer invests in automated production machinery, its variable costs per unit fall, rotating the TC curve downward. Therefore, even if output and price remain unchanged, the firm's supernormal profit rises because the same level of revenue is now associated with a lower total cost. This outcome also shifts the break-even output level to the left, meaning the firm covers its costs at a lower level of sales than before, further strengthening its financial position.

Draw a profit maximisation diagram (MR = MC) with the following features clearly labelled: MR, MC, AR=D, and AC curves; profit-maximising output Q* where MC cuts MR from below; price P* read off the AR curve; and a clearly shaded rectangle between P* and AC at output Q* representing supernormal profit. This shaded area is the key feature examiners look for. Open full diagram →

This diagram shows the profit-maximising output where MR = MC, with supernormal profit represented as the shaded rectangle between AR (price) and ATC at that output level. When costs fall — for example due to investment in technology — the ATC curve shifts downward, widening the supernormal profit rectangle. Ensure the diagram is fully labelled with MR, MC, AR, ATC, the profit-maximising output Q*, and the supernormal profit area clearly shaded and annotated.

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  Profit as a gap, not a point. On a TR/TC diagram, profit is the vertical distance by which TR exceeds TC. Students must be able to identify both the maximum profit output (where this gap is largest) and the two break-even outputs (where TR = TC), and explain how any shift in TC or TR changes these.

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  What shifts the TC curve. A fall in input costs (raw materials, labour, energy) shifts TC downward; a rise in input costs shifts it upward. Investment in technology typically reduces variable costs, which changes the slope of TC, whereas a fall in fixed costs produces a parallel downward shift.

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  What shifts the TR curve. A fall in sales volume moves the firm to a lower point along the existing TR curve — it does not shift the curve itself. A change in price, however, alters the slope of the TR curve (assuming a linear demand relationship), pivoting it around the origin.

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  Mergers and economies of scale. After a merger, a combined firm may achieve economies of scale that reduce average costs, shifting TC downward. If TR is maintained or increased through greater market power, the widening gap between TR and TC represents higher profit.

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  Reading a loss on the diagram. A firm makes a loss where TC lies above TR. The size of the loss is the vertical distance between the two curves at the firm's chosen output. Rising costs that push TC above TR at all output levels result in no profit-maximising output — only a loss-minimising one.

This question tests students' ability to apply and interpret a standard cost and revenue (TR/TC) diagram to analyse changes in a firm's profitability resulting from shifts in costs or revenue. The underlying economic mechanism is the relationship between total revenue, total cost, and profit — specifically how changes in production costs, input prices, technology, or sales affect the vertical gap between the TR and TC curves. This falls under Edexcel spec point 3.3.4.b, which covers costs and revenues in the context of firm behaviour and profitability. Students are expected not only to draw the diagram accurately but to use it as analytical evidence, explaining the chain of causation that leads from a change in an economic variable to a change in the firm's profit or loss position.

Examined 6 times across Edexcel since 2017.

The highest tariff recorded is 12 marks, and five of the six appearances carried that full weighting, indicating that diagram-based profit and loss analysis has consistently been assessed at the extended reasoning level rather than as a standalone drawing exercise.