3.3.2 Cost Flashcards
When are economic costs incurred
by a business engaging in producing/supplying an output
Some of these costs relate to the opportunity cost of production
What are the costs of production in the short run
At least one fact inputs are fixed (usually capital/land)
Businesses are constraint with fixed and variable factors
What are long-run costs for production
All factors of production are variable, and the scale of production can also change allowing the firm to benefit from economies of scale
What are fixed costs
do not vary at all as the level of output changes in the short run
They always have to be paid - even if output is zero
The higher the level of fixed cost in a business, the higher the output must be in order to breakeven
Give some examples of fixed costs
Consulting fees
Rental costs
Marketing budgets
Research project
fixed salary costs
Business Insurance
What are variable costs
costs that relate directly to the production/sale of a product
An increase in short-run output, will cause total variable costs to rise
Average variable costs (AVC) =
Total variable cost / output
TVC/ Q
Variable costs is determined by what
the marginal cost of extra units as more labour is hired
Give some examples of variable costs
Commission bonuses
Wage costs - more labour being hired
Component parts
Basic raw materials
Energy and Fuel Costs
Packaging costs
Total costs =
Total Fixed costs + Total Variable costs
Marginal Costs =
The addition tot total cost of producing one more unit
Work out Total costs
Marginal costs
and Average costs
Total Costs = 300 + 200 = 500
Total Costs = 300 = 250 = 650
Marginal Costs = (650-500) / (1000-500) = 0.3
Average Costs = 500 / 500 = 1
Average Costs = 650 / 1000 = 0.65
What is Total production
Total output, or total units produced
What is marginal production
the additional output when an extra worker (or factor of production) is employed
What is average production
Total output / number of workers
Is also the same as productivity
When does diminishing returns set in
When the marginal product of labour starts to fall
Work Out
Marginal Output
Average Output
And if the returns are rising or diminishing
Average = 8 / 1 = 1
Marginal = 20 - 8 = 12
Average = 20 / 2 = 10
How does short-run production link to diminishing returns
- Easiest way to increase output is to employ more workers - leading to productivity to rise through division of labour (focusing on specific tasks)
- However, as more workers are added to fixed capital, workers cannot be utilised as efficiently - causing productivity to fall
- This causes diminishing returns
- The marginal product of labour starts to fall, and after a point seep below average production and the marginal cost of supplying extra output will increase
How would Marginal Cost and Average Cost be shown on a diagram
Average costs = Marginal Costs at the lowest part of the AC curve
Average costs will fall when marginal costs are smaller than average costs
Average costs will rise when Marginal costs are bigger than average costs
How would
Marginal Costs
Average Costs
Average Variable costs
And Average Fixed costs be shown on a diagram
Average Variable costs are the variable cost per unit of output
AVC is determined by the shape of Marginal costs - MC rises cuz of diminishing returns
Average fixed costs fall as output increases because total fixed costs are being spread over a higher level of production - it is the area between average costs and Average variable costs
The Marginal costs curve is the same as what
The supply curve
Factors that would cause a shift in the Marginal cost curve would cause a shift in the supply curve
What are these
- Changes in unit cost of production
- Depreciation in exchange rates causes higher prices of imports of commodities/raw materials
- Advances in tech
- Entry of new producers into a market - more suppliers
- Taxes, subsides and Gov regulations
How would you show a rise in Fixed Costs
Causes an upwards shift in average total cost but doesn’t cause marginal cost curve to change - a change in variable cost will shift both
How would you show a rise in variable costs
Ways in which changes in Government economic policy can influence the cost of businesses
- Changes in VAT and other indirect taxes
- Environmental taxes - like carbon tax
- changes in labour market and minimum wage
- Subsidies by Gov
How would a rise in minimum wage affect profitability of a business
- Legally protected pay floor
- Rise in variable costs - due rise in hourly wage costs
- Depends on price elasticity
- Profit margins may fall
- marginal and average total costs will increase too
Define Law of diminishing returns
in the short run when variable factors of production are added to a stock of fixed factors of production total/marginal product will rise then fall
(costs will initially fall then rise)
When does total productivity peak
When Marginal product = 0
The point where adding anymore workers would lose productivity
Describe point 1 and point 2 on the graph and the reason for it happening
•1 – Labour productivity increases – adding workers allows them to specialise, utilising fixed factors or production better
2 – Labour productivity decreases – fixed factors of production become a restraint
Average costs is
Cost per unit
What are returns to scale
The change to output when factors of production are added
Describe points 1, 2 and 3 and what is happening
- Increasing return to scale - %∆Output>%∆Inputs
- Constant returns to scale - %∆Output=%∆Inputs
- Decreasing returns to scale: %∆Output
What is the minimum efficient scale
is the lowest level of output required to exploit full economies of scale
AC curve stops decreasing
