Costs Flashcards
How is profit measured?
Profit = Total Revenue - Total Costs
What is technical efficiency?
Avoiding waste to produce a ‘given’ output level using minimum inputs
What is the assumption about costs?
There are only 2 inputs/factors of production, capital and labour
What is the difference between factors of production in the short term and long term?
Short - at least one factor is fixed so there are variable and fixed factors of production - production level depends on the intensity to which the fixed factor is used
Long - no factors are fixed, all variable - production is changed by varying all the factors in the most optimal way (least cost), long run REQUIRES INVESTMENT
What is Total Product?
The total amount produced
What is Marginal Product?
Change in total product as a result of one unit increase in a variable factor
What is Average Production?
Total Product divided by quantity of input used
What is the production function?
Technological relationship between inputs and outputs e.g. effect of introducing more labour to fixed capital (diminishes)
What is the Law of Diminishing Returns?
As a firm uses more of a variable inputs, there comes a point where each additional unit of variable factor will produce less extra output than the previous unit = bell shape
When does increasing marginal returns occur?
Initially each additional unit exceeds the previous; e.g. specialisations/division of labour
What is the difference between products and costs?
Products relate to outputs
Costs relate to inputs
What happens to costs in the short run?
Costs are increased as the firm can only increase the variable factor
What is Total Cost?
Costs of all factors of production used by the firm
What is Marginal Cost?
Change in total cost from one unit increase in output
What is Average Cost?
The cost per unit of output
What is the equation for average cost?
(TVC/Q) + (TFC/Q) Q=output
What is the equation for marginal cost?
(change in TC)/(change in Q)
What is the relationship between AC and AVP and MC of MP
They are inverse of each other
AVP not AP because fixed costs have a different shape
Why is the Marginal Cost curve U-shaped?
Initially there are economies/increased returns but then decreases due to diminishing returns
Why does AVC tend towards ATC?
Fixed costs are being spread over the increasing output
Explain the AFC shape?
It starts high when there is a small output but the ‘divides’ between the increased output
What is the main focus of long run costs?
Altering the size of capital stock to achieve the least cost means of production
Why does LRAC follow the run of multiple SRATC?
Because there are no fixed costs, there are an infinite number of factory sizes for example
Why is LRATC ‘U’-shaped?
Increasing returns to scale
constant returns to scale
decreasing returns to scale
What is the difference between economies of scale and diseconomies of scale?
Economies of scale have falling long-run average costs as production increases (specialisation, bulk buying, better discount)
Diseconomies of scale have rising long-run average costs as production increase (complex management organisation structures)
What are normal profits?
A payment to the entrepreneur sufficient to reward him for deploying his capital in the current form of production, included in average costs
(opportunity cost of providing the entrepreneurship factor of production)
What are the 4 factors of production?
Entrepreneurship
Labour
Capital
Land
What are abnormal profits?
Profits generated greater than normal profits