3.4.4 - Costs of Production Flashcards
What does production entail?
Converting inputs to outputs without a consideration for money costs of using inputs like capital and labour.
What is the short-run?
When at least one factors of production is fixed.
What is the long-run?
When none of the factors of production can all be changed.
What are short run costs made of?
Fixed costs and costs incurred when hiring the services of the variable factors of production.
What are long run costs made of?
Only variable costs.
In the long term, there are no fixed costs as all factors of production are variable.
What is fixed cost?
The cost of production, which in the short run, does not change with output.
What is variable cost?
The cost of production which changed with the amount that is produced, even in the short run.
What are generally assumed to be fixed costs in the short term?
Capital, Land (possibly enterprise)
What does capital involve in terms of fixed costs?
The cost of maintaining a firm’s buildings as well as the initial cost of acquiring buildings such as factory space and offices.
What are generally considered variable costs of production in the short term?
Labour and the cost of raw materials.
What is total cost?
The cost incurred when producing a particular size of output.
What is average variable cost?
The total variable cost divided by size of output.
What is marginal cost?
The addition to total cost resulting from producing one additional unit of output.
What happens in terms of costs when a firm increases its output?
The total cost of production increases.
How does one derive the Marginal Cost (MC) curve from the Average Variable Cost (AVC) curve and the marginal and average returns curves?
Take the difference of two total costs, then divide by the total change in outputs between those two.
What are average fixed costs?
Costs of employing the factors of production / Size of output.
What are the fixed costs of production also known as?
Overheads.
What are the overheads that most businesses pay in the short run?
Rent on land, maintenance on buildings etc.
How do the overheads of a company change as they produce more cars?
As more cars are produced, the actual overheads do not change as they are fixed, however, the average fixed costs per car falls per each car is made.
If the overhead is 1 million, and the company produces one car, the average fixed cost per car is 1 million. If they produce 2, the average fixed cost per car is 500,000. If they produce 3, the average fixed cost per car is 333,333 etc.
Can average costs of production ever equal 0?
No. Although they can get very close.
What is average total cost?
The total cost of producing a particular level of output, divided by the size of output: ATC = AFC + AVC.
How can you find the average total cost?
Add the AFC and AVC curves at any point of output.
What is interesting about the Average Total Cost Graph in the short run?
The average costs of production fall initially, but at higher levels of output average costs usually rise.
Why do ATC curves decrease and then increase?
Employing more workers up to a certain point increases the business output more than employing new workers increases the businesses costs.
