3.3.2 Costs Flashcards
What are fixed costs?
Fixed costs are costs that do not change as the level of output changes
These have to be paid whether output is zero or 5000
E.g. building rent, management salaries, insurance, bank loan repayments etc
What are variable costs?
Variable costs are costs that vary directly with output
These increase as output increases and vice versa
E.g. raw material costs, wages of workers directly involved in production
What is marginal cost?
Marginal cost is the cost of producing an additional unit of output
What are short run cost curves?
That period of time in which at least one factor of production is fixed.
E.g. it is difficult to change machinery or the number of factories in the short run, but this can be achieved in the long run.
Labour is rarely the fixed factor as it is easy to hire new workers.
What are long run cost curves?
That period of time in which all of the factors of production are variable.
This is also called the planning stage as firms can plan for increased capacity and production
What is Marginal product of labour (MP)
The change in output that results from adding an additional unit of labour
Explain the Law of diminishing marginal productivity
In the short run, as more of a variable factor (e.g. labour) is added to fixed factors (e.g. capital), there will initially be an increase in productivity.
However, a point will be reached where adding additional units begins to decrease productivity due to the relationship between labour and capital
What determines the shape of the cost curves in the short run?
In the short-run, the shapes of the cost curves (AC, AVC and MC) are determined by the law of diminishing marginal productivity
If production was on the Y and QTY of Labour on the X, the cost curves would increase (so production increases as qty of labour increases) until the DMR point is met where production decreases as QTY of labour increases.
What happens as marginal product increases?
Marginal costs decrease
Increasing returns = decreasing costs
Decreasing returns = increasing costs
What is marginal product?
The additional output produced by adding one more unit of a variable factor, like labor, while holding other factors (like capital) constant.
What is AVC
This is the cost for each cup, but only considering the things that change as you make more lemonade (like paying workers). It doesn’t include fixed costs (like your stand).
