SR Cost curves Flashcards
Total cost formula
Total fixed cost + total variable cost
What is the short run
The period over which at least one factor of production is fixed (usually capital)
Fixed inputs
Can’t be changed quickly
E.g: machinery, buildings, capital, heavy equipment
Variable inputs
Can change relatively quickly and easily
Iron rods, labour employed
What is the long run
The period over which the firm is able to vary the inputs of all its factors of production
Law of diminishing returns
If a firm adds successive units of a variable factor (labour) while holding inputs of the other factor fixed (capital), it will eventually derive diminishing marginal returns from the variable factor
Marginal product
The revenue of making one extra unit of the good
Why does one increase output
Increases efficiency by specialisation and the division of labour
Why does marginal product fall with many additions
Ever diminishing rate
Fixed costs
Costs which do not vary as the level of production increases or decreases.
Variable costs
Costs which vary directly in proportion to the level of output of a firm
Semi-variable costs
Costs which vary with output but not in direct proportion
Total cost (TC)
The cost of producing any given level of output.
TC = TVC + TFC
Average cost (AC)
The average cost of production per unit, calculated by dividing the total cost by the quantity produced. It is equal to average variable cost plus average variable cost plus average fixed cost.
AC = TC / Q
Average variable cost (AVC)
Variable cost per unit or total variable cost divided by output
AVC = TVC / Q
Average fixed cost (AFC)
Fixed cost per unit or total fixed cost divided by output
AFC = TFC / Q
Marginal cost
The cost of producing an extra unit of output or the change in total cost divided by the change in output
MC = 🔺 TC /🔺 Q
What happens to AFC as output rises
Always falls
What curves are U-shaped
MC, AVC, ATC due to law of diminishing returns
Lowest point on the MC curve
Shows where diminishing marginal returns set in
Lowest point on AVC curve
Shows the point at which diminishing average returns sets in
ATC
AFC + AVC
TFC
TC-TVC or AFC x Q
MP
🔺TP
AP
TP / Q
