3.3.2 - Costs

Question 1

What Is The ‘Short-Run’?

Answer 1

Length of time, when at least one FOP is fixed.

Question 2

What Is The ‘Long-Run’?
(2 Points)

Answer 2

~ When all factors of production are variable.

~ So there are only variable costs present.

Question 3

What Are The 2 Groups Of Costs?

Answer 3

~ Explicit.

~ Implicit.

Question 4

What Are Implicit Costs?

Answer 4

Opportunity costs of production.

Question 5

What Are Explicit Costs?

Answer 5

Costs, which require actual payment.

Question 6

What Are Examples Of Explicit Costs?
(2 Points)

Answer 6

~ Variable costs.

~ Fixed costs.

Question 7

What Are Variable Costs?

Answer 7

Costs, which vary with output.

Question 8

What Are Examples Of Variable Costs?
(2 Points)

Answer 8

~ Wages.

~ Raw material costs.

Question 9

What Are Fixed Costs?

Answer 9

Costs, which don’t vary with output.

Question 10

What Are Examples Of Fixed Costs?
(2 Points)

Answer 10

~ Rent.

~ Salaries.

Question 11

What Are Total Costs?

Answer 11

TVC + TFC.

Question 12

How Is Average Fixed Cost (AFC) Calculated?

Answer 12

TFC / Q.

Question 13

What Does The AFC & TFC Curve, Look Like?
(2 Points)

Answer 13

~ AFC decreases, as quantity increases, as fixed costs spread across more units of output.

~ These 2 costs are only relevant in the SR

Question 14

What Are Marginal Costs & How Is It Calculated?
(2 Points)

Answer 14

~ Additional cost, of selling an
extra unit.

~ ∆TC / ∆Q.

Question 15

If A Firm Productivity Increases, What Happens With Regards To Marginal Cost?

Answer 15

Decreases.

Question 16

If A Firm Productivity Decreases, What Happens With Regards To Marginal Cost?

Answer 16

Increases.

Question 17

What Is The Law Of Diminishing Marginal Returns?
(2 Points)

Answer 17

~ In the SR, when variable FOPs are added to a stock of fixed FOPs, productivity will additionally rise and then fall.

~ Only occurs in the SR.

Question 18

Describe The Law Of Diminishing Marginal Returns, Effect On Costs
(2 Points)

Answer 18

~ When there are fewer employees, fixed FOPs > variable FOPs, allowing for specialisation and underutilisation of capital, increasing productivity.

~ When more employees are hired, variable FOPs > fixed FOPs, some workers don’t specialise and are constrained by fixed FOPs, decreasing productivity.

Question 19

What Is The Marginal Cost Curve Influenced By?

Answer 19

Law of diminishing marginal returns.

Question 20

What Are Total Variable Costs (TVC)?

Answer 20

All the firms variable costs, added up.

Question 21

How Is Average Variable Cost (AVC) Calculated?

Answer 21

TVC / Q.

Question 22

What Is The Average Variable Cost (AVC) Curve Influenced By?

Answer 22

Law of diminishing marginal returns.

Question 23

How Is Average Total Cost (ATC) / Average Cost (AC) Calculated?

Answer 23

TC / Q Or AVC + AFC.

Question 24

Why Is The LRAC Curve U-Shaped?

Answer 24

Due to economies and diseconomies of scale.

Question 25

Why Is The LRAC Curve Shaped The Way It Is? (2 Points)

Answer 25

~ As a firm grows, it generates new SR curves. ~ This is due to returns to scale.