LS3 : Costs and Revenues Flashcards
what is the short run?
the time period in which at least one factor of production is fixed. eg. capital
what is the long run?
the time period in which all factors of production are variable
what is variable costs?
business costs that vary directly with output since more variable inputs are required to increase output. operating costs or wages paid to temp staff.
they can be altered in the short run (labour, ingredients, energy etc.)
what are fixed costs?
business costs that do not vary directly with the level of output. they cannot be altered in the short run. sunk costs which are costs that the firm cannot avoid paying. (capital, land)
what is the total product?
the amount of goods or services produced
what is marginal product?
the additional amount of goods or services produced by increasing the variable factors of production
why does marginal product initially increase?
- workers able to specialise
- workers may use of fixed factors of production
why does marginal product eventually decrease?
- workers become increasingly inefficient with fixed space and capital and machinery and equipment
what is the law of diminishing returns (diminishing marginal productivity)?
when one variable FoP is increased while other factors stay fixed, eventually the marginal returns from the variable factors will begin to decrease.
what is total costs equal to?
total fixed costs + total variable costs
what is a common assumption made by economists about this diagram?
in the short run, at very low levels of output, total costs will rise more slowly than output. however, as diminishing returns occurs, total costs will accelerate
what is the equation for average fixed costs?
total fixed costs / output
what is the equation for average variable costs?
average variable costs = total variable costs / output
explain the marginal cost diagram.
- u shaped due to diminishing returns
- capital is fixed in the short run
- after a certain point, increasing workers leads to declining productivity
- as employees increase, marginal costs increases
draw the curves for average costs. include marginal costs, average total costs and average variable costs.
ATC = total costs / quantity AVC = variable costs / quantity AFC = fixed costs / quantity
draw the graph for average fixed costs and fixed costs.
the AFC curve slopes down because fixed costs are distributed over a larger volume of quantity produced.
draw the graph showing the relationship between TC, FC and VC.
total cost = variable costs + fixed costs
draw the diagram showing economies and diseconomies of scale.
- as output increases, average costs decrease
- at Q2, diseconomies of scale is experienced where the firm no longer can operate with lower costs (eg. difficult to communicate and coordinate workers)
- if a firm has higher fixed costs, they will find it easier to experience economies of scale
not all firms will experience diseconomies of scale. the lrac may just slope downwards.
