Costs

Question 1

What is economic cost (2)

Answer 1

The opportunity cost of production
The value that could have been generated had the resources been employed in their next best use

Question 2

What is fixed cost (2)

Answer 2

Level of output doesn’t effect cost
Rent

Question 3

What is a variable cost

Answer 3

Level of output does effect costs - raw materials

Question 4

Total costs formula

Answer 4

Amiable + fixed costs together

Question 5

Semi variable costs

Answer 5

Labour
Some firms employ permanent staff which will be a fixed cost but they may ask them to do overtime or employ temporary labour

Question 6

What is total costs

Answer 6

Cost of producing at a given level of output

Question 7

Formula fro AC, AFC + AVC (3)

Answer 7

AC = total costs / quantity
AFC = TFC / level of output
AVC = TVC / level of output

Question 8

What is the MC and what is the formula

Answer 8

Cost of producing an extra unit of output
Change in TC / change in Q.

Question 9

Diagram of TFC, TVC + TC (4)

Answer 9

TC - upwards wave
TFC - straight
TVC - upward wave
TC are higher than variable and where they start straight TFC line starts

Question 10

Short run average cost curves (4)

Answer 10

AFC = reduce and continue to reduce = L shape (4)
AVC = falls and then increases = less of shape (3)
ATC = fall and then increase = u shape (2)
MC = fall and then increase = fastest (1)

Question 11

Why short run cost curves look the way they do (3+ )

Answer 11

AFC = falls as output increases because fixed costs are spread over larger output.
AC + AVC = fall at first and then rise. This is because of diminishing returns setting in = the difference between the two curves is the AFC
The MC curve falls at first and then rises as diminishing marginal returns sets in

Question 12

What is diminishing marginal returns (2+)

Answer 12

Marginal product/output rises due to specialisation = allows the fixed capital to be used more efficiently
After a point MP falls = fixed capital has become increasingly scarce + needs to be shared out + workers become less productive

Question 13

What is total product

Answer 13

Quantity of output produced by a given number of inputs over a period of time

Question 14

Average product (2)

Answer 14

Quantity of output per unit of input
Total product / quantity of inputs

Question 15

What is marginal product

Answer 15

The additional output produced by an additional unit of input

Question 16

What is the short run

Answer 16

Where at least one factor of production is fixed

Question 17

Describe shape of MC and AC (2)

Answer 17

U shaped
Lowest point = where dismissing marginal + average returns sets in

Question 18

Relationship of MP AP and MC AC (3+)

Answer 18

MP + AP highest when MC + AC lowest
P increases = more inputs mean greater outputs = increasing returns to scale
P decreases = more input means output is smaller = diminishing returns to scale