3.3.2 Costs Flashcards
What is a firm?
Any sort of business organisation.
E.g. A family-run factory, a supermarket or a law firm.
What is an industry?
A particular branch of economic activity (all firms in an industry provide similar goods or services).
How do firms generate revenue?
By selling their outputs (goods and services).
What is profit?
A firm’s its total revenue minus its total costs.
In the long run, what do firms need to do to survive?
Make a profit
What does the cost of production refer to?
The economic cost of producing the output.
This includes the money cost of factors of production, but also the opportunity cost of the factors that aren’t paid for.
What is opportunity cost?
The opportunity cost of a factor of production is the value of the next best alternative foregone.
- E.g. if you run your own business the money you could earn doing other work is the opportunity cost of your labour.
What do costs in economics take into account?
Cost in economics isn’t just a calculation of money spent – it takes into account all of the effort and resources that have gone into production. This includes opportunity cost.
What does the short run refer to?
The period of time when at least one of a firm’s factors of production is fixed.
How long is the short run?
The short run isn’t a specific length of time – it varies from firm to firm.
- For example, the short run of a cycle courier service could be a week because it can hire new staff with their own bikes quicky, but a steel manufacturer might have a short run of several years because it takes lots of time and money to build a new steel-manufacturing plant.
What are fixed costs?
Costs that don’t vary with output in the short run - they have to be paid whether or not anything in produced.
- For example, the rent on a shop is a fixed cost - it is the same regardless of sales.
What are variable costs?
Variable costs do vary with output - they increase as output increases.
- For example, the cost of the plastic bags that a shop gives to its customers is a variable cost - the higher sales are, the higher the overall cost of the bags.
Costs can be ____ or ____ in the short term…
- Fixed
- Variable
What does the long run refer to?
The period of time when all factors of production are variable.
In the long run, all costs are variable.
Total cost
All the costs involved in producing a particular level of output.
Marginal Cost calculation
How do changes in marginal cost affect average cost?
Cost curve diagram
[See diagram on reverse of card].
What might cause a shift in the LRAC curve?
External economies of scale will cause the LRAC curve to shift downwards by reducing average costs at all output levels.
External diseconomies of scale will force the LRAC curve to shift upwards.
A change in taxation might cause the LRAC curve to shift up or down. E.g. an increase in fuel duty would cause a bus company’s LRAC to shift up.
New technology could cause the LRAC curve to shift down if it means firms can use factors of production more efficiently at all levels, e.g. faster computers for workers.
Relationship between marginal returns and marginal cost.
Marginal returns (or marginal product (MP)) are related to marginal cost (MC):
- As marginal returns rise, marginal cost falls.
- As marginal returns fall, marginal cost rises.
Marginal cost will rise as marginal returns fall because – ceteris paribus – if you’re getting less additional output from each unit of input then the cost per unit of the output will be greater.
