Costs Flashcards

1
Q

What two types of costs do firms have?

A

1) Fixed costs.
2) Variable costs.

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2
Q

What are costs of production?

A

The cost of producing output. This refers to monetary cost of the factors of production, as well as opportunity cost of production.

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3
Q

What are fixed costs?

A

Costs that do not change as output changes. E.g. rent and salaries.

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4
Q

What are variable costs?

A

Costs that change with output. E.g. raw materials and packaging.

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5
Q

What is total cost (TC)?

A

The costs involved in producing a certain level of output.

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6
Q

What is total fixed cost (TFC)?

A

The part of total cost that does not vary with output.

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7
Q

What is total variable cost (TVC)?

A

The part of total costs that vary with levels of output.

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8
Q

What is average cost (AC)?

A

The cost per unit produced.

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9
Q

What is the formula for average cost (AC)?

A

AC = TC ÷ Q
Average costs = total cost ÷ output produced

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10
Q

What is average fixed cost (AFC)?

A

The total fixed cost per unit of output.

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11
Q

What is the formula for average fixed cost (AFC)?

A

AFC = TFC ÷ Q
Average fixed cost = Total fixed cost ÷ output

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12
Q

What is average variable cost (AVC)?

A

The total variable cost per unit of output.

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13
Q

What is the formula for average variable cost (AVC)?

A

AVC = TVC ÷ Q
Average variable cost = total variable cost ÷ output

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14
Q

What is marginal cost (MC)?

A

The cost of producing one more unit of output.

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15
Q

What is the formula for marginal cost (MC)?

A

MC = ΔTC ÷ ΔQ
Marginal cost = change in total cost ÷ change in output

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16
Q

Are costs variable or fixed in the short-run?

A

Fixed.

17
Q

What is the short-run?

A

The period of time when at least one factor of production is fixed. It is not a fixed period of time, and can vary in-between industries.

18
Q

Explain the TFC curve in the short-run.

A

A straight, horizontal line, showing that as output increases, TFC remains unchanged in the SR.

19
Q

Explain the TC curve in the short-run.

A

A line that rises as output rises, because as output rises, TVC increase, increasing TC.

20
Q

Explain the TVC curve in the short-run.

A

A line that rises as output increases, but is below the TC curve.

21
Q

What is the assumption of diminishing marginal productivity/the law of diminishing returns?

A

At a certain point, increasing a variable factor of production will eventually lead to a smaller output.

22
Q

Where is the point of diminishing marginal productivity on the SR cost curve?

A

The point at which the MC curve begins to rise.

23
Q

Explain the AC curve in the short-run.

A

It is U-shaped, with the AC curve originally falling as output increases because additional variable factor inputs lead to greater output at lower average cost. AC eventually starts to increase as MC rises.

24
Q

At what point does the MC curve always intersect the AC curve?

A

At the lowest point of the AC curve.