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Theme 3 > 3.3.2 Costs > Flashcards

3.3.2 Costs Flashcards

1
Q

Short run

A

The period in which a firm in unable to vary the input of at least one of its factors, while being able to change all of the other
- at least one factor of production is fixed
- fixed and variable costs

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2
Q

Long run

A

All inputs can be varied
- all factors of production are variable
- only variable costs

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3
Q

Fixed cost

A

Independent of output level
- e.g ads, rent

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4
Q

Variable costs

A

Depend on the level of output
- e.g staff

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5
Q

Total cost (short run) definition

A

Total cost to produce a given level of output (an increase in output = increase in total costs

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6
Q

Total cost formula

A

Total cost = total fixed cost + total variable cost

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7
Q

Total variable cost

A

In the long run, all factors input can change meaning all costs are variable (change with output)
- e.g staff

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8
Q

Total fixed cost

A

In the short run, at least one factor of production cannot change meaning there are some fixed costs (do not vary with output)

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9
Q

Average price level

A

The output of producing at an extra unit of cost

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10
Q

Marginal cost (short run)

A

Additional cost of producing one extra unit of output (once MC gets too high, the MPL is diminishing)

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11
Q

Marginal cost formula

A

∆TC/∆Q (new total cost- old total cost/new quantity-old quantity)

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12
Q

Average total cost (short)

A

Total cost ÷ quantity of output produced (TC/Q)

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13
Q

Average variable cost

A

Variable cost ÷ quantity of output (VC/Q)

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14
Q

Average fixed cost

A

Fixed cost ÷ quantity of output (FC/Q)

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15
Q

Short run cost curves diagram

A
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16
Q

Relationship between marginal cost & average variable cost & short run average total cost

A
  • SAVC curve falls when the short run marginal cost curve is below it & rises when the short run marginal cost curve is above it
  • thus, the two curves cross at the lowest point on the average cost curve
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17
Q

Short run cost curves explanation

A
  • Looking at the MC curve (this is the increase in total cost, variable cost, when output increases by a unit)
  • to produce an additional unit of output requires labour input. Thus labour demand is a derived demand
  • Labour is a variable factor & combined with capital, which is a fixed factor in the short-run, produces output
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18
Q

Marginal product of labour

A

company’s increase in total production when one additional unit of labor is added

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19
Q

Marginal product of labour formula

A

∆Q/∆L

20
Q

Average product of labour

A

(The labour needed to product an extra unit of output) measure of how much each worker produces, on average. You simply divide total product by the number of employees.

21
Q

Average product of labour formula

A

Q/L

22
Q

Diminishing marginal product of labour/productivity graph

A
23
Q

Diminishing marginal product of labour/productivity

A
  • adding more units of a variable input to a fixed input, increase output at first. But after a certain no. Inputs are added, the marginal increase of output remains constant
  • then when there is an even greater input, the marginal increase in output starts to fall
24
Q

Diminishing marginal product of labour example

A

Adding more workers
- marginal product increases without the first few additions of workers (specialisation). Workers are more efficient when they specialise in production & work together to produce a good
- eventually MP decreases (law of diminishing returns. At some point, each additional worker contributes less output than the worker before

25
Q

Why does diminishing marginal product of labour happen?

A

Production can lead to bottlenecks because capital is fixed- workers are waiting for machinery to become open

26
Q

How can MP be negative?

A

Capital is fixed in the short run. If more and more workers keep getting added, they will get in each other’s way & actually cause output to fall

27
Q

Total product curve graph

A
28
Q

Total product curve

A
  • As unit of output increases by one, less labour is needed up to a certain point
  • If output is fixed, but labour is decreasing, then firms can pay less wage for labour = less cost needed = higher profit
  • If marginal product is diminishing an increasingly larger amount of labour is required for each additional unit of output
29
Q

Example of total product curve

A

If wage rate is fixed: MC = wage rate ÷ MPL
- MC falls if MPL is increasing & increases if MPL is falling
-

30
Q

Short run cost curves with diminishing marginal product

A
  • MC, ATC and AVC rise with diminishing returns. AFC falls with increased output
  • Highlighted are the points in which DMP sets in. Before this, AC is creasing. After AC is increasing
31
Q

Long run cost curves graph

A
32
Q

Long run cost curve explanation

A
  • LRAC curve falls when the LMC curve is below it & rises when the LMC is above it
  • Thus two curve cross at the lowest point on the AC curve
  • If fixed costs are high, AC decreases as output increases
  • When diseconomies of scale set in, AC increases (long run)
33
Q

Relationship between SRAC and LRAC graph

A
34
Q

Relationship between SRAC and LRAC

A
  • LRAC curve envelopes the SRAC curve & is always equal to or below the SRAC
  • LRAC shifts when there are external economies of scale (e.g industry growing)
  • SRAC falls at first, then rises due to diminishing returns
  • If SRAC = LRAC, the firm operates where it can vary all factor inputs
35
Q

Returns to scale and LAC

A

Returns to scale can determine the LAC shape

36
Q

Returns to scale (LAC) graph

A
37
Q

Returns to scale example

A
38
Q

Increased economies of scale…

A

…(due to increased output) increased research and development, increased quality, decreased price = increased consumer surplus

39
Q

Marginal cost

A
  • the increase in total cost, variable cost, when output increases by a unit
40
Q

A firm which prints greetings card records its short run costs. It observes that the average cost per card decreases s more are produced, although the marginal cost is rising. It follows that…

A

Marginal costs are below average costs

41
Q

Suppose that your firm operates on the rising segment of its long-run average total cost curve. in order to produce output at a lower average cost you must

A

Reduce output and build a smaller plant

42
Q

If a firm is producing at the lowest point of ATC, to be productively efficient…

A

The firm should increase its level of output

43
Q

What happens to the graph when there’s a change in fixed costs?

A

AC curve moves

44
Q

What curve does fixed costs shift?

A

AC curve

45
Q

What curve does variable costs shift?

A

AC and revenue

Theme 3 (15 decks)

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