3.3.2 costs Flashcards
what is the formula for total costs?
total costs = fixed cost + variable cost
TC = FC + VC
what are fixed costs?
fixed costs don’t vary with output, they are constant and have to be paid even if the firm produces nothing eg. rent, insurance, loan payments
what are variable costs?
costs that vary directly with output. when output increases, costs for things such as raw materials, labour increase. variable costs are zero when there is no output
what is the formula for average total cost?
average total cost = total costs / quantity
ATC = TC / Q = AFC + AVC
what is the formula for average fixed cost?
average fixed cost = fixed costs / quantity
AFC = FC / Q
what is the formula for average variable cost?
average variable cost = variable costs / quantity
AVC = VC / Q
what is the formula for marginal cost?
marginal cost = change in total cost / change in quantity.
represents the amount added to the total cost of production by the next unit of output
explain the shape of short-run cost curves
-before the optimal factor combination, there are increasing returns when FOPs are increased. this means that when input is doubled, output is more than doubled, therefore the average total cost is decreasing due to low marginal cost
-the optimal factor combination is reached at Q* where the fixed factor becomes saturated
-after the optimal, there are diminishing marginal returns when new FOPs are employed. when inputs are doubled, outputs are less than doubled and average total cost increases
what is the relationship between ATC and MC?
If the marginal cost is greater than the average cost, the average is increased. If the marginal cost is lower than the average cost, the average cost is pulled down
What is the shape of the AFC (average fixed costs) curve like?
It starts high because there are large fixed costs being divided by a small output. As output increase, AFC falls as fixed costs are diluted by higher output levels.
What is the shape of the ATC (average total cost curve) like?
ATC is u-shaped due to the law of diminishing marginal returns. Costs fall initially as machinery is used more efficiently but as production continues to grow, efficiency falls as machinery becomes overused.
What is the shape of the AVC (average variable cost) curve like?
u-shaped, gets closer to ATC as production expands because AFC gets smaller
What is the shape of the MC (marginal cost) curve like?
U-shaped due to law of diminishing marginal returns.
What is the relationship between short-run and long-run cost curves?
SRAC curves are u-shaped due to diminishing returns but LRAC is u-shaped due to economies and diseconomies of scale. LRAC is an envelope for all SRAC curves. If firms need to expand their output, there will be a rise in SRAC as some factors of production are fixed. However, in the long run, all factors are variable and the SRAC curve can be shifted, making it lower as the firm can benefit from economies of scale. This continues until the firm reaches constant returns to scale and eventually diseconomies of scale.
What is the LRAC curve?
A boundary representing the minimum level of average costs available at any given level of output. Points below the LRAC are unattainable and points above the LRAC are inefficient.
How does movement along the LRAC curve occur?
Caused by a change in output, changing the average costs of production due to economies and diseconomies of scale.
What causes a shift in the LRAC curve?
A shift can occur due to external economies and diseconomies of scale, taxes or technology, which affect the cost of production for a given level of output.
