Costs Flashcards
What are costs?
Costs are the payments that firms make for use of the factors of production. Examples include rent, wages and interest.
What is included in costs?
A reward for risk taking aka normal profit
What is total cost?
Refers to the cost of producing a given level of output
What is total fixed costs?
These costs do not change directly with output. Examples: rent paid for factory building, business rates and advertising
What are total variable costs?
They vary directly with output. Examples: raw materials used to make goods and services, wages of workers on zero hour contracts and energy costs for a steel manufacturer
What is the formula of total costs?
TC = TFC + TVC
What is the formula for total fixed costs?
TFC = TC-TVC
What is the formula for total variable costs?
TVC = TC-TFC
What is average cost?
Is the cost per unit of output
What is the formula for average cost?
AC = TC / Q
How does AC react to an increase in Q?
Initially falls because the fixed cost is spread out over more units of output
What is average fixed cost?
Fixed cost per unit of output
How does AFC react to an increase in Q?
They are spread out as more is produced. Since fixed costs do not change with output then by definition fixed cost per unit must fall as output increases.
What is the formula for average fixed cost?
AFC = TFC/Q
What is average variable cost?
It is the variable cost per unit of output
