Cost (Chunk 2)

Question 1

Short run

Answer 1

A period of time in which at least one resource/ factor of production/input is fixed.

e.g a factory wants to increase output.
Easy to increase labour and raw materials
Size of factory is fixed.

Question 2

Long run

Answer 2

A period of time in which no resources / factors of production / inputs are fixed i.e. All are variable.

e.g the same factory can now move into a larger factory or operate in multiple factories

Question 3

Fixed costs

Answer 3

Are those that do not change as production levels change (eg. rent, rates, insurance).

Question 4

Variable Costs

Answer 4

Are those costs that change and/or are directly related to production levels (eg. electricity, materials, production workers’ wages).

Question 5

Law of Diminshing Returns

Answer 5

In the short run, if more and more variables input (eg. labour) is added to a fixed input (eg. capital), the addtion to production gained will at some point start to fall.

Question 6

Increasing return factors

Answer 6

When variable inputs are added to a fixed inputs it leads to produciton effiencies e.e. an increase in productivity output / input