3) cots + costs and time

Question 1

what are fixed costs

Answer 1

costs incurred by a firm that do not vary with the level of output

Question 2

what are variable costs

Answer 2

costs that vary with the level of output

Question 3

what is the total cost?

Answer 3

the sum of all costs that are incurred in producing a given level of output

Question 4

what is the average total cost?

Answer 4

total cost divided by the quantity produced often called
average cost (AC), also called unit cost

Question 5

what is the average fixed cost?

Answer 5

fixed cost divided by the quantity produced

Question 6

what is the average variable cost?

Answer 6

variable cost divided by the quantity produced

Question 7

what is marginal cost?

Answer 7

the cost of producing an additional unit of output

Question 8

what is the short run?

Answer 8

the period in which at least one factor of production is fixed in supply

Question 9

what is the variable factor of production

Answer 9

firms can use overtime to increase labour quickly

Question 10

what is the long run?

Answer 10

the period over which the firm is able to vary the inputs of all its factors of production

Question 11

what is a fixed factor of production?

Answer 11

machinery or buildings can take a while to commission, so
capital is fixed in the short run, but variable in the long run

Question 12

what is the law of diminishing marginal returns?

Answer 12

a law stating that if a firm increases its inputs of one
factor of production while holding inputs of other factors of production fixed, eventually the firm will get diminishing marginal returns from the variable factor

Question 13

what are sunk costs?

Answer 13

costs incurred by a firm that cannot be recovered if the firm ceases trading

Question 14

what is the minimum efficient scale?

Answer 14

the level of output at which long-run average cost stops
falling as output increases

Question 15

The short run is…for different businesses

Answer 15

different

Question 16

why does The marginal cost curve cross the average cost curve at the lowest point on the average cost curve?

Answer 16

• When the marginal cost is below the average cost curve, the cost of one more is bringing the average cost down
• When the marginal cost is above the average cost curve, the cost of one more is bringing the average cost up
• So when the marginal cost is equal to the average cost, the marginal cost is not changing the average cost – it must be equal

Question 17

in the short run can inputs be varied?

Answer 17

In the short run some inputs cannot be varied, so some costs are fixed and others are variable

Question 18

some fixed costs are also…costs…

Answer 18

Some fixed costs are also sunk costs – they cannot be recovered if the firm leaves the market

Question 19

example of a sunk cost

Answer 19

advertising

Question 20

what does the SR average cost curve show?

Answer 20

A short run average cost curve (SRAC or SATC) shows the relationships between the volume of production and costs under the assumption that the quantity of capital and other inputs are fixed – to change the output, the firm has to vary the amount of labour

Question 21

what does the position of the cost curve depend on?

Answer 21

The position of the cost curves depend on the quantity of capital and, in the long run, this (along with labour, land and enterprise) can change

Question 22

in the short run what can happen to the cost curve?

Answer 22

In the short run firms can move along their short run average cost curve (SRAC) as although the quantity of capital is fixed, labour is a variable factor of production.

Question 23

in the long run what can happen to the SR cost curve?

Answer 23

In the long run the SRAC curve can be shifted due to changes in the amount of capital available. At first there are increasing returns to capital, so the SRAC curve is shifted
down as output increases. However, eventually there are decreasing returns to capital so the SRAC curve shifts up as output increases. The locus of SRAC minima are taken
forming the long run average cost (LRAC) curve.

Question 24

evaluation: why is the law of diminishing returns is not important

Answer 24

1) Small firms may not need to consider it
• A firm with a small number of staff or a small amount of capital may only experience increasing returns to scale

Question 25

evaluation: why is the law of diminishing returns important?

Answer 25

1) No infinite profits
• The law of diminishing returns explains why firms cannot make infinite profits

2) Explains why profit maximisation exists
• The law of diminishing returns results in there being a level of production at
which profits are maximised – profit maximisation