3.3 Revenues, costs and profits Flashcards
what is the law of diminishing returns
as increasing quantities of a variable factor are applied to a fixed factor, there comes a point where marginal productivity falls
define fixed costs
don’t change with output
define sunk costs
irretrievable cost which cannot be retrieved if the firm leaves the market
define variable costs
costs depending on the level of output
total cost formula
fixed costs + variable costs
total variable cost formula
average variable cost x output
average total cost formula
total cost/output
average fixed cost formula
total fixed cost/output
average variable cost formula
total variable cost/output
marginal cost formula
change in total cost/ change in output
how do economists and accountants differ in their approach to costs
ECON - opportunity cost is a cost
ACCOUNT - do not include opp. cost
why does MVC = MC
- MFC is always 0
- MC = MFC + MVC
- => MC = MVC
why are TC and TVC parallel
- FC do not change
- => vertical distance between the lines remain constant
why does MC cross AC at its minimum
- where MC < AC, each additional unit pulls AC down
- where MC > AC, each additional unit pulls AC up
- => where MC = AC, is a minimum
what is MES
minimum efficient scale (productive efficiency) - the lowest point on a cost curve at which a company can produce its good at the lowest possible unit cost ( where E of S have been fully exploited)
