3.1.6 - Costs Flashcards
(25 cards)
What is the definition of the short run in economics?
The short run is that period of time when at least one factor of production is fixed.
What are fixed factors in the short run?
Fixed factors are factors of production that cannot be increased in size, such as the size of a factory.
What are variable factors in the short run?
Variable factors are factors of production that can be increased in the short run, such as labour and raw materials.
What is the definition of the long run in economics?
The long run is that period of time where all the factors of production are variable.
Is there a fixed length of time for the short run and long run?
No, the length of the short run and long run depends on the nature of the industry.
Give an example of a short run that may be quite short.
An accountancy firm may be able to increase the size of its business in a matter of weeks if it rents office space.
Provide an example of an industry with a longer short run.
A North Sea oil company may take years to expand due to the time required to build and commission a new oil platform.
What determines the shape of many short run cost curves?
The law of increasing and diminishing returns
This law indicates the relationship between variable and fixed inputs in production.
What happens to marginal output when more of a variable input is added to a fixed input?
Marginal output initially rises but then falls
This reflects the concept of diminishing returns in production.
Fill in the blank: The law of increasing and diminishing returns states that as more of a variable input is added to a fixed input, _______ will initially rise but then fall.
marginal output
What is marginal product?
The increase in output caused by the increase in the variable factor, in this case labour.
Marginal product measures how much additional output is generated by adding one more unit of input.
What happens when the first three workers are added?
They lead to increasing marginal returns, meaning each extra worker adds more than the previous one.
Increasing marginal returns occur due to specialization and division of labour.
What is the effect of specialization in production?
Jobs can be split up so that each worker can focus on a specific task and become skilled at it, making production more efficient.
Specialization allows workers to increase their productivity.
What occurs when the fourth worker is added?
Diminishing marginal returns start to set in, where each extra worker adds to total product but less than the previous worker.
Diminishing marginal returns occur when additional input results in smaller increases in output.
Why do diminishing marginal returns occur?
Extra workers crowd the fixed factor, such as the number of machines or factory size, leading to inefficiencies.
This crowding effect means that workers interfere with each other’s ability to use the available machinery.
What can happen when the sixth worker is added?
An extra worker can lead to a fall in production, known as negative marginal returns.
Negative marginal returns indicate that adding more input can actually decrease total output.
What is the main point made by the Law of Increasing/Diminishing Returns Graph?
If average output or marginal output are rising, it is the same as saying that average costs or marginal costs are falling. Vice Versa.
What are fixed costs also known as?
Indirect costs or overheads
Fixed costs do not vary with output.
What happens to fixed costs when output is zero?
They must still be paid
Fixed costs remain constant regardless of output level.
Name an example of a fixed cost.
Examples include:
* Rent on the premises
* Interest on a loan
* Business rates
* Managerial salaries
* Depreciation
* Advertising
These costs do not change with the level of output.
What shape does the fixed cost curve have?
Horizontal
Fixed costs remain constant irrespective of output.
True or False: Fixed costs can never change.
False
Fixed costs can change, for example, if rent increases or interest rates rise.
Fill in the blank: Fixed costs do not vary with _______.
output
Fixed costs remain the same regardless of how much a firm produces.
