costs Flashcards
what are factors in the short run?
at least one factor of production is fixed
what are factors in the long run?
all factors are variable
why are all factor variable in the long run?
- no specific timeframe
- labour easiest to change
what are variable costs?
change with the amount produced/ vary with output e.g wages
what are fixed costs?
dont vary with output e.g salary
what happens in the long run for a firm ?
- no diminishing returns
- economies/ diseconomies of scale
- all costs aare variable
diminishing marginal return
why are all costs variable in the long run?
- as all factors of production are variable this means that all costs are variable
- if a firm wants to close all its premises then it can. if it wants to increase its premises then it can
what is diminishing marginal return?
after some optimal level of capacity is reached, adding an additional factor of production will actually result in smaller increases in output
what is the law of diminishing marginal return?
law of diminishing marginal return- decreasing productivity in the short run as more factors of production are employed
as you add variable resources to fixed resources, the additional output will eventually dec.→ marginal cost inc.
e.g adding workers with a fixed amount of capital
draw a marginal cost diagram
why is the MC curve shaped like a nike tick?
MC decreases at first due to productivity and specialisation
MC increases due to a decrease in productivity because of diminishing marginal returns
why is AR downwards sloping?
AR curve is downwards sloping because of law of diminishing marginal utility→ same as price
why is the MR curve steeper than AR?
MR curve steeper because you have to lower prices for all customers to gain an extra few customers
what are the two ways of calculating total cost?
- total cost= TVC + TFC
TVC= total variable cos TFC= total fixed cost - total cost= AC (average cost) x Q
draw a fixed cost diagram?
why is AFC always falling?
- AFC is always falling because:
TFC/ Q= AC
how do you calculate marginal cost?
marginal cost= change in total cost/ change in quantity
where does MC go through AVC?
MC goes through AVC at the lowest point
when is AVC lowest?
AVC is lowest when MC=AVC
why does AC fall?
because fixed cost shared across more units and also because of specialisation. it rises again due to diminishing marginal return
why is AVC U-shaped?
AVC is U-shaped because it changes based on quantity
draw a costs diagram
what does the cost/revenue diagram look like when fixed costs increase?
what does it mean if P>MC
society benefits because the value placed by consumers on a product is more than the cost of resources used to make it
what does it mean if P<MC
the resources used to make goods are more valuable than the benefit to the consumer
Draw the diagram for average fixed and average variable costs
what is the relationship between AC and MC
AC will rise when MC>AC
AC will fall when MC<AC
VC increases as output increases, costs increase so therefore MC will also increase
why does AFC decrease as output increases
why is ATC higher than AVC
this is because fixed costs are spread over a larger level of output
ATC is higher than AVC because TC= VC + FC