3.3.3 - Costs

Question 1

3.3.2 Costs

a) Formulae to calculate and understand the relationship
between: Total Cost

Answer 1

• TC = TVC + TFC
• cost of producing at a given lvl of output

Question 2

3.3.2 Costs

a) Formulae to calculate and understand the relationship
between: Total Fixed Costs

Answer 2

Fixed costs do not vary with output

Question 3

3.3.2 Costs

a) Formulae to calculate and understand the relationship
between: Total Variable Costs

Answer 3

• Costs changing with output
• as production increases, so does costs

Question 4

3.3.2 Costs

a) Formulae to calculate and understand the relationship
between: Average Total Cost

Answer 4

AC = TC/Q (output)

Question 5

3.3.2 Costs

a) Formulae to calculate and understand the relationship
between: Average Fixed Costs

Answer 5

AFC = TFC/Q (output)

Question 6

3.3.2 Costs

a) Formulae to calculate and understand the relationship
between: Average Variable Cost

Answer 6

AVC = TVC/Q (output)

Question 7

3.3.2 Costs

a) Formulae to calculate and understand the relationship
between: Marginal Cost

What it is + equation

Answer 7

• How much it cost to produce one extra unit
• MC = Change in TC/Change in Q (ouput)

Question 8

3.3.2 Costs

b) Derivation of short-run cost curves from the assumption
of diminishing marginal productivity

Answer 8

• law of diminishing marginal returns states that in the S-R when variable factors of production (usually labour) are added to a stock of fixed factors of production (usually land and capital), total/marginal product will initially rise then fall
• Adding more units of a variable input to a fixed input, increases output at first. However, after a certain number of inputs are added, the marginal increase of output becomes constant. Then, when there is an even greater input, the marginal increase in output starts to fall.
• in SR firms will employ at least 1 factor input which cant vary eg given num of machines.
• if it were to increase output by using more of the variable factor inputs, diminishing marginal returns and the diminishing average returns would set in eventually

Question 9

3.3.2 Costs

c) Relationship between short-run and long-run average cost curves

Answer 9

• In S-R at least one factor input of production is fixed. Therefore in SR some costs are fixed whilst others are variable
• in the LR all factor inputs can vary so in LR all costs a VC/TVC

Question 10

TFC and AFC curves

Answer 10

• TFC - horizontal line curve = constant whatever lvl of output
• AFC - falls as output increases - TFC/Q - constant/rising = AFC will fall

Question 11

TC and TVC curves

Answer 11

• curve shape due to law of diminishing marginal returns eg initial increasing returns to labour and the law of DR sets in and decreases returns (falling productivity), they are parallel as diff between is (constant TFC)

Question 12

MC and AC/AVC curves

Answer 12

Shaped by law of diminishing marginal returns:
- AC and AVC curves fall first then rise as diminishing average returns set in - vertical diff between is value of AFC
- MC - fall first then rise as diminishing returns set in