3.3.1-2 Costs & Revenues Flashcards
Short run period?
Period over which the firm is free to vary the input of variable/flexible factors but not of fixed factors
Law of diminishing returns?
If firm increases amount of inputs of variable factor (labour) while holding constant input of other factor (capital), will gradually derive less additional output per unit of labour for each further increase
e.g. fixed no. of computers and increasing no. of workers example
Short-run concept as relies on assumption that capital is fixed
Sunk costs?
Costs that the firm cannot avoid paying/get back even if it chooses to produce no output (e.g. capital)
Variable costs?
Those such as operating costs or wages paid to short-term contract staff
Total costs =
Variable costs + fixed costs
Long run period?
Firm is able to vary inputs of both variable and fixed factors
Average fixed cost =
(AFC)
Fixed costs / Output
As output increases, what happens to AFC?
Falls as fixed costs are being spread across a greater output
Average variable costs =
(AVC)
Variable costs / Output
Average cost/Average total cost =
(AC/ATC)
AFC + AVC
Marginal cost =
ΔTC / ΔQ
Change in cost over one-unit change in output
Explain relationship between MC curve and AC and AVC curves
MC goes through middle of AC and AVC
If MC < AC or AVC, then the average will fall
If MC > AC or AVC, then the average will rise
If MC = AC or AVC, average will not change
Why does the gap between AC and AVC narrow as output rises?
Gap = AFC
AFC falls as output rises
AC = AVC + AFC
TR = ?
P X Q
AR = ?
TR / Q
Revenue per unit of output sold
