3.3.2: Costs Flashcards
What is economic cost?
The opportunity cost of production.
What are fixed costs?
Constant costs that don’t change with output (e.g. rent).
What are variable costs?
Costs that change directly with output (e.g. raw materials).
What are total costs?
Fixed Costs + Variable Costs.
What are average fixed costs?
Total Fixed Costs / Output.
What are average variable costs?
Total Variable Costs / Output.
What are average total costs?
Total Costs / Output.
What are marginal costs?
The extra cost of producing one extra unit of a good
(Change In Total Costs / Change In Output).
What happens to the factors of production in the short run?
At least one factor of production is fixed.
What is the law of diminishing marginal productivity?
If a factor of production is fixed, adding units of a variable input to a fixed input increases output at a decreasing rate.
Short Run Costs Curve:
ATC (3 points):
-ATC falls when MC < ATC.
-ATC minimum where MC & ATC intersect.
-ATC rises when MC > ATC.
AFC (2 points):
[NOT ON GRAPH]
-AFC is the gap between ATC and AVC.
-AFC falls as output levels increase.
AVC (1 point):
-AVC minimum is where MC & AVC intersect.
What happens to the factors of production in the long run?
All factors of production are variable.
SRAC and LRAC curve:
Why is the SRAC curve U-shaped?
Due to the law of diminishing marginal returns.
Why is the LRAC curve U-shaped?
Due to economics of scale/diseconomies of scale.
LRAC is always ________ ________ or ________ SRAC (an envelope to the minimum points of SRACs).
Equal to, below.
If SRAC=LRAC…
… the firm operates where it can vary all factor outputs.
