Production costs Flashcards
What is the total cost?
TC = FC + VC
Total cost of producing a given output. The more you produce, the higher the total cost of production.
What are fixed costs?
Costs which do not change with output in the short run.
These are cost whic h are even there when the output is zero. Because you need to pay for insurance, security and rent.
The more you produce, the lower the average fixed cost.
What are variable costs?
Costs that vary directly as output changes.
As output increases, total variable costs rises.
They tend to rise slowly at first, due to a higher productivity.
Ex. Electricity (The more units you produce, the more energy you need)
In the long run all cost are variable.
What are marginal costs?
Is the increase in total cost of producing an extra unit of output.
How are marginal costs calculated?
MC = Change in total cost/ Change in output
Ex.
Output changes from 0 –> 25
Total costs changes from 400–> 800
MC = 800 / 25 = 16
What is revenue?
The total amount of money recieved by firms through sale of their products.
How is average revenue calculated?
Average Revenue = Total revenue / Quantity sold
–> price per unit
How can profit be maximised?
By increasing sales and when the firm is reducing its cost of prouction.
When is profit maximised?
When the gap between revenue and cost is greatest.
Making as much profit as possible.
How is total profit calculated?
Total profit = Total revenue - Total cost
How is the profit per unit calculated?
Profit per unit = Average Revenue - Average Cost
What is the Break-Even-Point?
Is the output level at whoch there is zero profit.
Total revenues = Total costs
How us the Break-Even-Point calculated?
BEP = Total Fixed costs / (Selling Price- Variable costs)
Ex.
TFC = 1000 €
Selling price per unit = 100€
Cost per unit: 50€
BEP = 1000€/ (100€-50€) = 20
–> you need to sell 20 units to break even
