Costs

Question 1

Define and give the formula of: Total Costs

Answer 1

The cost of producing a given level of output

Total Fixed costs + Total Variable Costs

Question 2

Define and give the formula of: Total and Average Fixed Costs
Total and Average Variable Costs

(give examples where necessary)

Answer 2

TFC- costs that don’t vary with output (e.g. rent,salaries,capital)
AFC= TFC/Output

TVC- costs that vary with output (e.g. raw materials, wages)
AVC= TVC/Output

Question 3

Define and give the formula of:
Marginal Costs

Answer 3

The additional cost of producing one extra good/service

change in total costs/change in output

Question 4

Go on sketchpad and Draw on one curve:
MC
ATC
AVC
AFC

Answer 4

Did you remember:
-Nike tick shaped MC curve
-AFC is always falling
-AVC is u-shaped and intersects MC at its lowest point
-ATC is the same shape as AVC but slightly higher and intersects MC at its lowest point

Question 5

Name and explain the reason why the MC is shaped like that

Answer 5

The Law of Diminishing Marginal Productivity:
-In the SHORT RUN only

-When you initially increase factor inputs, productivity will increase due to specialisation, initially decreasing MC

-Due to one factor of production being fixed, adding more factor inputs will lead to a decrease in productivity, which will increase MC

Question 6

Go on sketchpad and Draw on one curve:
LRAC
Multiple SRAC curves

Region of the graph with
-Economies of scale
-Diseconomies of scale
-Constant Returns to scale
-Minimum efficient scale

Answer 6

Did you do:
-One large LRAC
-Many SRAC within the LRAC
-Economies of scale when LRAC is decreasing as output increases
-Constant returns to scale when LRAC is constant as output increases
-Diseconomies of scale when LRAC is increasing as output increases
-Minimum efficient scale when LRAC first hits its lowest