Costs (3.3.2) Flashcards
What are the three types of costs?
-Fixed Costs
-Variable Costs
-Marginal Cost
What are Fixed costs?
Costs that do not change as the level of output changes. These have to be paid whether output is zero or 5000
What are some examples of fixed costs?
-Building rent
-Management salaries
-Insurance
-bank loan repayments
What are variable costs?
Costs that vary directly with output. These increase as output increases and vice versa
What are examples of variable costs?
-Raw material costs
-Wages of workers directly involved in production
What are marginal costs?
The cost of producing an additional unit of output
What is the equation for total costs?
Total fixed costs (TFC) + Total Variable Costs (TVC)
What is the equation for Total Variable cost?
Variable cost (VC) x Quantity (Q)
What is the equation for Average total cost?
Total cost (TC)/ Quantity (Q)
What is the equation for Average fixed cost?
Total Fixed Costs (TFC)/ Quantity (Q)
What is the equation for Average variable cost?
Total Variable costs (TVC)/ Quantity (Q)
What is the equation for marginal cost?
Change in total cost (TC)/ Change in Quantity (Q)
What does short-run mean?
The period of time in which at least one factor of production is fixed
What does long-run mean?
The period of time in which all of the factors of production are variable
What does marginal product of labour (MP) mean?
The change in output that results from adding an additional unit of labour
What is the law of diminishing marginal producitvity?
In the short run, as more of a variable factor (e.g. labour) is added to fixed factors (e.g. capital), there will initially be an increase in productivity. However, a point will be reached where adding additional units begins to decrease productivity due to the relationship between labour and capital
What does the law of diminishing marginal productivity look like on a cost graph?
Slide 12
What’s a real-life example of Law of diminishing marginal productivity?
-A small food van selling burgers (product) at a music festival increases productivity up to the addition of a third worker.
-After that, workers get in each other’s way and there is not enough grill space (capital) so MP no longer increases.
-If more workers are hired, then the MP of each additional worker begins to fall.
-Adding additional workers up to the 7th worker will keep increasing the total product.
-With the hiring of the 7th worker, the MP turns negative, which will decrease the total product
What happens to the marginal cost if marginal product increases?
Marginal costs decrease as they have an inverse relationship.
Increasing returns = decreasing costs
Decreasing returns = increasing costs
What are short-run and long-run operations in a business?
Short-run= day to day operations
Long-run= Businesses plan to increase the scale of production (e.g. increasing size of factory)
What does the LRAC curve look like?
Slide 13
