Costs in the Short-run

Question 1

Why do firms operate in a market?

Answer 1

Maximise profits

Question 2

Total fixed costs

Answer 2

Cost that do not vary with output
- rent or interest

Question 3

Total Variable costs

Answer 3

Cost that does very with output
- raw materials or ingredients

Question 4

Total cost

Answer 4

Sum of all costs incurred at a given level of output
- fixed costs + variable costs

Question 5

Average cost

Answer 5

Total cost / quantity

Question 6

Marginal cost

Answer 6

The change in total costs as a result of the change in output by one unit

Question 7

Short-run

Answer 7

When at least one factor of production is fixed in supply
- usually capital as you cannot easily increase it in the short run

Question 8

How can some labor costs be variable in the short run?

Answer 8

• Individuals on zero hour contracts
• as demand for good increases more workers can be called in for employment
• some workers can be made redundant whenever

Question 9

Law of diminishing returns

Answer 9

As the input of a variable factor is increased, the additional output produced by each additional unit of input falls meaning short run average costs increase as the production process is constrained by a fixed factor

Question 10

Why might employing more workers be inefficient?

Answer 10

• as you employ more workers, increases output in the short run, but as you keep employing workers the return you receive decreases
• firms can hire more workers but capital is fixed so workers may have to share responsibility so output diminishes
• goes up at a slower rate

Question 11

What happens to average costs when output increases?

Answer 11

Initially fall as the fixed costs are spread out over more units of output but as diminishing returns sets in average costs increase