costs

Question 1

what are factors in the short run?

Answer 1

at least one factor of production is fixed

Question 2

what are factors in the long run?

Answer 2

all factors are variable

Question 3

why are all factor variable in the long run?

Answer 3

• no specific timeframe
• labour easiest to change

Question 4

what are variable costs?

Answer 4

change with the amount produced/ vary with output e.g wages

Question 5

what are fixed costs?

Answer 5

dont vary with output e.g salary

Question 6

what happens in the long run for a firm ?

Answer 6

• no diminishing returns
• economies/ diseconomies of scale
• all costs aare variable
  diminishing marginal return

Question 7

why are all costs variable in the long run?

Answer 7

• as all factors of production are variable this means that all costs are variable
  
  • if a firm wants to close all its premises then it can. if it wants to increase its premises then it can

Question 8

what is diminishing marginal return?

Answer 8

after some optimal level of capacity is reached, adding an additional factor of production will actually result in smaller increases in output

Question 9

what is the law of diminishing marginal return?

Answer 9

law of diminishing marginal return- decreasing productivity in the short run as more factors of production are employed

as you add variable resources to fixed resources, the additional output will eventually dec.→ marginal cost inc.
e.g adding workers with a fixed amount of capital

Question 10

draw a marginal cost diagram

Answer 10

Question 11

why is the MC curve shaped like a nike tick?

Answer 11

MC decreases at first due to productivity and specialisation
MC increases due to a decrease in productivity because of diminishing marginal returns

Question 12

why is AR downwards sloping?

Answer 12

AR curve is downwards sloping because of law of diminishing marginal utility→ same as price

Question 13

why is the MR curve steeper than AR?

Answer 13

MR curve steeper because you have to lower prices for all customers to gain an extra few customers

Question 14

what are the two ways of calculating total cost?

Answer 14

• total cost= TVC + TFC
  TVC= total variable cos TFC= total fixed cost
• total cost= AC (average cost) x Q

Question 15

draw a fixed cost diagram?

Answer 15

Question 16

why is AFC always falling?

Answer 16

• AFC is always falling because:

TFC/ Q= AC

Question 17

how do you calculate marginal cost?

Answer 17

marginal cost= change in total cost/ change in quantity

Question 18

where does MC go through AVC?

Answer 18

MC goes through AVC at the lowest point

Question 19

when is AVC lowest?

Answer 19

AVC is lowest when MC=AVC

Question 20

why does AC fall?

Answer 20

because fixed cost shared across more units and also because of specialisation. it rises again due to diminishing marginal return

Question 21

why is AVC U-shaped?

Answer 21

AVC is U-shaped because it changes based on quantity

Question 22

draw a costs diagram

Answer 22

Question 23

what does the cost/revenue diagram look like when fixed costs increase?

Answer 23

Question 24

what does it mean if P>MC

Answer 24

society benefits because the value placed by consumers on a product is more than the cost of resources used to make it

Question 25

what does it mean if P

Answer 25

the resources used to make goods are more valuable than the benefit to the consumer

Question 26

Draw the diagram for average fixed and average variable costs

Answer 26

Question 27

what is the relationship between AC and MC

Answer 27

AC will rise when MC>AC AC will fall when MC

Question 28

why does AFC decrease as output increases why is ATC higher than AVC

Answer 28

this is because fixed costs are spread over a larger level of output ATC is higher than AVC because TC= VC + FC