costs and revenues (L3) Flashcards
what factor is fixed and what factor is flexible
firms face limited flexibility- changing quantity of labour is easy (hire or fire workers) but capital is harder so labour is a flexible factor, capital is a fixed factor
how is the short run defined
the firm is free to vary variable factors but not fixed ones
how is the long run defined
the firm is free to vary both fixed and variable factors
law of diminishing returns (short run concept)
when variable factors are increased but the fixed variables stay the same, it derives less extra output per unit of labour for each further increase.
sunk costs
costs the firm can’t avoid paying evem if it produces no output
variable costs
operating costs/wages paid to short term contract staff etc
total costs
total fixed+total variable costs
common assumption made by economists about total costs in short run
at low levels of output, total costs rise slower than output
average fixed costs
fixed costs/output
why does AFC fall when output increases
the fixed cost is being spread across a greater output
average variable costs
variable costs/output
marginal cost
change in total cost when one additional unit of output is produced
why does the gap between the average total cost and variable cost get smaller as output rises?
AC=AFC+AVC as output rises,average fixed costs fall so AVC rises because of diminishing returns
revenue
payments received when firms sell goods
total revenue
price x quantity
