3.3 - Costs Flashcards
Revenues, costs and profits
What are total costs?
The total cost of all the output (quantity) produced by a firm
How do you calculate total costs?
Total fixed costs + Total variable costs
What are fixed costs?
Costs that do not change/vary with the level of output a firm produces
What are some examples of fixed costs?
- Building rent
- Insurance
- Licenses
What are variable costs?
Costs that change/vary with the level of output produced by the firm
What are some examples of variable costs?
- raw material costs
- wages of workers
- electricity bills
What are average costs?
Cost per unit of output
How do you calculate average (total) costs?
Total costs/quantity produced
What are marginal costs?
The cost of producing an additional unit of output
How do you calculate total variable costs?
Variable cost X Quantity
How do you calculate total fixed costs?
Total fixed costs X Quantity
How do you calculate average fixed costs?
Total fixed costs/quantity
How do you calculate average variable costs?
Total variable costs/quantity
How do you calculate marginal cost
Change in total cost/Change in quantity
What is the short-run?
period of time in which at least one factor of production is fixed
What is the long-run?
period of time in which all the factors of production are variable
What is the marginal product of labour?
the change in output that results from adding an additional unit of labour
What is the law of diminishing marginal returns/productivity?
In the short run, as more of a variable factor (eg: labour) is added to fixed factors (eg: capital), there will initially be an increase in productivity. However, at a certain point,adding these additional units begins to decrease productivity due to the relationship between labour and capital (eg: less space)
> means that if a variable factor is increased when another factor is fixed, there will come a point when each extra unit of the variable factor will produce less extra output than the previous unit.
Describe the relationship between the short run and long run average cost curve…
- In the long run, a firm aims to produce at the lowest possible average cost, so LAC represents the envelope of all possible SAC curves.
- The LAC curve is tangent to the lowest point of the SAC curves at each level of output.
- As a result, the long-run average cost curve is typically flatter and more efficient than any of the short-run average cost curves.
> This reflects the firm’s ability to adapt and make optimal choices regarding input combinations and scale of production in the long run.
Describe the shape of the average cost curve…
Starts high because the total fixed costs are being divided by a smaller output. However as output increases, average fixed costs fall because the same cost is being divided by a greater output.
Why is the average total cost curve U-shaped?
Due to the law of diminishing marginal productivity. Costs initially fall as factors of production are efficiently used. However they increase at a certain level because efficiency decreases as a result of overuse of variable factors of production.
Describe the shape of the average costs curve…
U - shaped but gets closer to total costs curve as output increases since average fixed costs decrease
Why is the marginal cost curve U - shaped
law of diminishing marginal productivity
- marginal costs decrease initially as the additional variable factor of production increases efficiency ( marginal product )
- begin to increase as a certain level of output because efficiency is lost as a result of the relationship between fixed and variable factors of production.
Why does the marginal cost curve cross the average costs curve and the average variable cost curve at their lowest point?
- as long as producing the next unit (MC) is lower than the average, it will pull down the average
- when the cost of producing the next unit (MC) is higher than the average, it will pull up the average
