Short run costs

Question 1

What are fixed costs?

Answer 1

costs that do not vary with output; the total costs incurred when output is zero

Question 2

What are variable costs?

Answer 2

costs that vary directly with output

Question 3

What is the short run?

Answer 3

the period of time in which at least one factor of production is fixed

Question 4

What is the long run?

Answer 4

the period of time in which all factors of production are variable

Question 5

Show total costs in the short run

Answer 5

Total fixed costs TFC do not change with output
Total variable costs TVC increase as output rises, but the relationship is not linear because of the Law of Diminishing Returns
Total costs TC = TFC + TVC

Question 6

Show average costs in the short run

Answer 6

Average fixed costs AFC = TFC/Q; AFCdecreases with output
Average variable costs AVC; the curve is U-shaped, at lower outputs output rises faster than TVC; at higher outputs, TVC rise faster than output
Average total costs ATC = AFC + AVC

Question 7

What is marginal cost and show on the Average cost curves?

Answer 7

Marginal cost MC is the change in total costs when output increases by one unit.
**MC = change in total costs/change in output
**
* Marginal costs are variable costs; MC is the gradient of the TC

Question 8

Show how marginal costs rise in the short run

Answer 8

LAW OF DIMINISHING RETURNS as extra variable factors are added to fixed factors, the fixed factors e.g. capital become increasingly scarce and marginal product falls (from Q), causing marginal cost to rise