3.3.2 Flashcards
Formula for total cost
Total variable costs+ total fixed costs
total fixed cost
In the short run, at least one factor of production cannot change. This means there are some fixed costs
Indirect costs
Total variable cost
In the long run, all factor inputs can change
This means all costs are variable
Direct costs
ATC average total costs formula
Total costs/ quantity produced
Average fixed costs formula
Total fixed costs/ quantity
Average variable costs AVC formula
Total variable costs/ quantity
Marginal cost
How much it costs to produce one extra unit of output
Change in total costs/ change in quantity
The law of diminishing marginal productivity
It states that adding more units of a variable input to a fixed input, increases output first
However after a certain number of inputs added, the marginal increase of output becomes constant.
Then when there is an even greater input, the marginal increase in output starts to fall
Reasons for the law of diminishing marginal productivity
Could be due to labour becoming less efficient and less productive
What does the lowest point on the LRAC(long run average costs) represent
The minimum efficient scale
This is where the optimum level of output is since costs are lowest
What happens if fixed costs are high on a LRAC curve
Average costs are lowered as output increases
What happens to the LRACurve when diseconomies of scale sets in
Average costs increase
LRAC curve and SRAC curve
The LRAC curve envelopes the SRAC curve, and it is always equal or below the SRAC curve
The LRAC curve shifts when there are external economies of scale ie when an industry grows
SRAC falls at first, and then rises, due to diminishing returns
In the long run, costs change due to economies and diseconomies of scale
If SRAC=LRAC, the firm operates where it can vary all factor inputs
