3.3.2 - Costs Flashcards
What is flexibility like in the short run ?
There is limited flexibility
How can firms vary the quantity of labour input that the firm uses ?
They can increase the use of overtime, or hire more workers
They can do this fairly quickly
What problem arises when wanting to vary the amount of capital ?
It may take a long time
What types of factors are labour and capital ?
Labour is a flexible factor
Capital is a fixed factor
What is the short run defined as ?
The short run is defined as the period over which the firm is free to vary the input of variable factors, but not of the fixed factors.
What can occur in the long run relating to factors ?
The firm is able to vary inputs of both variables and fixed factors.
What is the law of diminishing returns ?
If the firm increases the amount of inputs of the variable factor (labour) while holding constant the input of the other factor (capital), it will gradually derive less additional output per unit of labour for each further increase.
What assumption does the law of diminishing returns rely upon ?
That capital is fixed
What are sunk costs ?
Costs that the firm cannot avoid paying even if it chooses to produce no output.
What are variable costs ?
Costs such as operating costs, or wages paid to short term contract staff
What is the equation for total costs ?
total costs = fixed costs + variable costs
When are total costs likely to increase ?
Total costs will increase as the firm increases the volume of production, because more of the variable input is needed to increase output.
What factors can the firm vary in the long run ?
Both capital and labour
It is thus likely to choose the level of capital that is appropriate for the level of output that it expects to produce.
What is the equation for average fixed costs ?
AFC = Fixed costs/output
What will happen to AFC as output increases ?
AFC is likely to fall as the fixed cost is being spread across a greater output
