L3- Costs and Revenues Flashcards
why is labour a flexible factor and capital a fixed factor
- in short run, firm faces limited flexibility
- varying quantity of labour input is straightforward- increase use of overtime, hire more workers but varying quantity of capital can take longer- e.g. long time to commission new machinery
why is labour a flexible factor and capital a fixed factor
- in short run, firm faces limited flexibility
- varying quantity of labour input is straightforward- increase use of overtime, hire more workers but varying quantity of capital can take longer- e.g. long time to commission new machinery
difference between short run and long run
- short run= firm can vary input of variable factors but not fixed
- long run- firm can vary input of both
explain the law of diminishing returns
- if firm increases input of a variable factor (labour) while keeping input of other factor constant (capital), it will gradually derive less additional output per unit of labour for each further increase
- (e.g. workers and computers)
- short run concept, based on assumption capital is fixed
what are sunk costs
in the short run some fixed costs are sunk costs- costs the firm cannot avoid paying even if it chooses to produce no output
examples of variable costs
- operating costs
-wages paid to short term contract staff
total costs
- total fixed costs + total variable costs
-increase as firm increases its volume of production as more variable input is needed to increase output
draw costs in short run diagram and explain it
- common assumption= short run, very low levels of output, total costs will rise more slowly than output, but as diminishing returns set in, total costs will accelerate
draw costs in long run and explain it
- long run= firm can vary capital and labour, thus likely to choose level of capital needed for level of output it expects to produce
- lots of short run average cost curves corresponding to different expected output levels and thus different levels of capital
- increasing returns to scale, constant returns to scale, decreasing returns to scale
- economies of scale, diseconomies of scale
- minimum efficient scale (MES)- lowest level of output required to exploit full economies of scale
how to calculate Average fixed costs (AFC) and unit
fixed costs/output
- ‘per unit of output’
- always fall as output increases
how to calculate average variable costs (AVC)
variable costs/ output
-‘per unit of output’
how to calculate average total cost (AC)
AFC+AVC or total cost/quantity produced
what does marginal mean
cost of selling one more unit
what is marginal cost (MC)
- change in total cost when one additional unit of output is produced
- gradient of the total cost curve= change in TC/ change in Q
rules of marginal cost in terms of diagram
- MC always goes through minimum point of AVC and AC
- if MC is greater tha n AC, AC must be rising
- only time AC is not falling or rising is when MC= AC and AC has stopped falling and is yet to start rising
