4.1.4.4 Costs of production Flashcards
What is the difference between fixed and variable costs?
Fixed costs: Costs that do not vary with output (e.g., rent, advertising).
Variable costs: Costs that change with output (e.g., raw materials, labor).
What is total cost?
Total cost is the sum of fixed and variable costs:
Total Cost = Total Fixed Costs + Total Variable Costs
What is average cost?
Average cost is the cost per unit of output:
Average Cost = Total Cost / Quantity Produced
What is marginal cost?
Marginal cost is the cost of producing one additional unit of output.
What is the difference between short-run and long-run costs?
Short run: At least one factor of production is fixed, so there are fixed and variable costs.
Long run: All factors of production are variable, so all costs are variable.
Why is the short-run average total cost curve U-shaped?
The short-run average total cost curve is U-shaped due to diminishing returns. Initially, average costs fall as output increases, but after a point, marginal costs rise, causing average costs to increase.
What is the shape of the long-run average cost curve?
The long-run average cost curve is U-shaped due to economies of scale (falling average costs) and diseconomies of scale (rising average costs).
What are economies of scale?
Economies of scale occur when increasing production leads to lower average costs due to factors like specialization, bulk buying, and efficient use of technology.
What are diseconomies of scale?
Diseconomies of scale occur when increasing production leads to higher average costs due to factors like management inefficiencies, communication problems, or overcrowding.
How does productivity affect costs of production?
Higher productivity reduces unit costs because more output is produced with the same input, making production more efficient.
How do factor prices affect firms’ costs?
If the price of a factor input (e.g., labor) rises, firms may switch to cheaper, more productive inputs (e.g., capital) to reduce costs.
What is the relationship between marginal cost and average cost?
When marginal cost is below average cost, average cost falls. When marginal cost is above average cost, average cost rises.
What is the optimum level of output?
The optimum level of output is where average costs are at their lowest, occurring at the minimum point of the long-run average cost curve.
How does the short run differ across industries?
The short run varies by industry. For example, the short run for pharmaceuticals (with high fixed costs) is longer than for retail (with lower fixed costs).
What is an example of a fixed cost?
Rent for a factory is a fixed cost because it does not change with the level of output.
What is an example of a variable cost?
The cost of raw materials is a variable cost because it increases as more output is produced.
How do economies of scale affect the long-run average cost curve?
Economies of scale cause the long-run average cost curve to slope downward as output increases, reducing average costs.
How do diseconomies of scale affect the long-run average cost curve?
Diseconomies of scale cause the long-run average cost curve to slope upward as output increases, raising average costs.
What happens to average costs in the short run as output increases?
Initially, average costs fall due to efficient use of fixed factors, but after a point, they rise due to diminishing returns.
How does the law of diminishing returns affect marginal cost?
The law of diminishing returns causes marginal cost to rise after a certain level of output, as additional inputs become less productive.
What is the relationship between total cost and output?
Total cost increases as output increases because variable costs rise with higher production levels.
Why might firms switch from labor to capital inputs?
Firms may switch to capital inputs if labor becomes more expensive or if capital is more productive, reducing overall costs.
How does the short-run average cost curve reflect diminishing returns?
The short-run average cost curve reflects diminishing returns by initially sloping downward (due to efficient use of fixed factors) and then upward (due to rising marginal costs).
How does the long-run average cost curve reflect economies and diseconomies of scale?
The long-run average cost curve reflects economies of scale (downward slope) and diseconomies of scale (upward slope), showing how average costs change as firms expand production.
