Costs of production

Question 1

define short run

Answer 1

whenat least one factorof production is fixed/ the other factors are variable - can change

Question 2

define long run

Answer 2

whenall factors are variable

Question 3

state what costs you can have in the short run

Answer 3

short run we can have both fixed costs and variable costs

Question 4

state what costs you can have in the long run and what this cost means, what does this mean for firms

Answer 4

all costs are variable - firms have enough time to make changes = no fixed costs

Question 5

define variable costs

Answer 5

costs which vary with output

Question 6

define fixed costs

Answer 6

costs thatdon’tvary with output

Question 7

define what total cost and state th formula for total cost

Answer 7

total cost is all the costs incurred in producing something or engaging in an activity.
- total variable costs + total fixed costs

Question 8

define average fixed cost and state the formula for AC OR ATC caluclation

Answer 8

AC is the per-unit cost of production
- formula: total fixed cost/ quantity

Question 9

what shape is the TFC (total fixed cost) curve and why?

Answer 9

total fixed cost is just a straight line, it’s fixed as it doesn’t change with output

Question 10

what happens to the AFC curve when AFC falls

Answer 10

AFC falls because as Q increases - fixed costs will be spread across more and more units
- always falling curve (AFC)

Question 11

define marginal cost

Answer 11

the additional cost of selling one extra unit

Question 12

what is the formula for marginal cost

Answer 12

MC = change in total cost/ change in quantity

Question 13

what is the relationship between costs and productivity

Answer 13

Productivity and marginal cost are inversely related
- If productivity increases, workers will produce quicker/ make fewer error - reducing the cost of the next unit (reducing marginal cost)
- If productivity decreases, workers are working more slowly and making more mistakes, increasing marginal cost

Question 14

describe the shapes of the marginal cost curve and the reasons for the shapes

Answer 14

• Marginal cost initially decreases because as output increases and more workers are hired, they can specialise, increasing productivity and decrease marginal cost.
• marginal cost will then increase because diminishing marginal returns will decrease productivity, increasing marginal cost.

Question 15

define total variable cost

Answer 15

total variable cost (TVC) is all a firms variable costs added together

Question 16

state the formula for AVC (average variable cost)

Answer 16

AVC = TVC/Q

Question 17

why does AVC first decrease

Answer 17

MC is below AVC (the cost of producing the next unit is less than the average) so marginal cost drags AVC down

Question 18

why does AVC then increase

Answer 18

MC is above AVC (the cost of producing the next unit is higher than the average). So MC pulls AVC up (Why AVC is now increasing)

Question 19

state the two ways to work out the average total cost (ATC) or AC

Answer 19

• ATC/ AC = TC/Q
• ATC/AC = AVC + AFC

Question 20

where will ATC intersect MC on the cost curve

Answer 20

• ATC will intersect MC at its lowest point

Question 21

describe the SRAC curve

Answer 21

in the short run when at least one factor of production is fixed, limiting a company’s range that they can produce = Cannot produce any More without expanding = small curves that join together

Question 22

describe the LRAC curve

Answer 22

As quantity increases, LRAC decreases then increases