Fixed and Variable Costs (AFC, TFC, AVC) Flashcards
we dont define short run in terms of
time
we define SR in terms of
variability of the FOP
What is teh Long Run
POT ? when all FOP are variable
What are the two types of costs in economcis
explicit
implicit
What are Explicit Cosst
Cosst that require actual/physical payment
What are implicit costs
A business’ Opportunity cost
as it doesn’t require physical payment it’s implicit
What are the two explicit costs
fixed costs
variable costs
fixed costs are
costs that don’t vary with output
even if business isn’t producing anything still must pay
variable costs are
costs that vary with output
pay more of these as you produce more
Examples of FC
rent
salaries (as contractual, usually yearly basis)
business rates
advertising
interest on loans
What is a business rate
tax paid on having a physical premises
Examples of VC
Wages (flexible and usually hourly, can change quickly)
Utility Bills(water, internet )
Raw material costs
Transport Costs
How does TFC look on graph
constant as doesnt change regardless of output
What is the axis on afc tfc avc curve
y axis - costs
x axis - output
AFC equation
TFC/Q
AC-AVC
How does AFC look
wider downward sloping, goes flatter as you go down
draw and check
why does afc curve look how it looks
with afc dividing constant number by increasing number so afc decrease the more that’s produced ( as spreading costs over output
What two curves arent affected by LODR
TFC
AFC
Average Variable Cost equation
TVC/Q
AC-AFC
How is average variable cost shaped
smily face
why does AVC look like a smily face
LODR
when we increase the number of workers we see a drop in AVC and a increase in output produced up to 3 workers what is this called
increasing returns to labour
when we hire 4th worker what happend
LODR kicks in as MP is falling (refer back to book )
when LP and MP decrease
When LP and MP decrease what happens
AVC will be rising
when avc is ri
