Costs Flashcards
What is the difference between the short run and long run in an economic context?
The short-run is when there is at least one fixed factor of production. The long run is when all factors of production are variable.
Why is at least one factor of production fixed in the short run?
In the short run, firms will find it difficult to hire extra workers as the recruitment process can be lengthy. Secondly, it can be difficult to obtain more land due to the high costs of purchasing land.
What is the law of diminishing returns?
When increasing quantities of a variable input are combined with a fixed input such as labour in the short run, then the marginal product and average product will eventually start to decline. The diminishing returns occur when both MP and AP decline.
What are the laws of the product rules?
The total product is at its peak where MP=0.
Secondly, the Marginal product curve cuts the average product curve at its highest point.
What is the difference between economies of scale and returns to scale?
Economies of scale refer to the feature of many production processes in which the per-unit cost of producing a product falls as the scale of production rises. Increasing returns to scale refers to the feature of many production processes in which productivity per unit of labor rises as the scale of production rises.
Production functions typically include capital as well as labor. The difference between economies of scale and returns to scale is that economies of scale show the effect of an increased output level on unit costs, while the return to scale focus only on the relation between input and output quantities.
What is increasing returns to scale, decreasing returns to scale and constant returns to scale?
Increasing returns to scale is when a percentage increase in inputs leads to a more than proportional increase in output.
Decreasing returns to scale occurs when a percentage increase in inputs, leads to a less than proportionate decrease in output.
What is the economic definition of cost?
The economic cost is the opportunity cost of production.
Diagrams of AC, AVC, AFC, MC, TC,TFC and TVC
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