Costs

• What is meant by total fixed costs?


  The total amount of money a business must pay to keep their operations running regardless oof how many products they make or sell. Total fixed cost does not change regardless of production or lack of production. Fixed costs are those that still exist even when production is at zero.
• What is the formula for total fixed costs?


  Total fixed costs = total costs - (variable costs per unit x quantity)
• What is meant by average fixed costs?


  The fixed cost that does not change with the change in the number of goods and services produced by a company.
• What is the formula for average fixed costs?


  average fixed costs = total fixed costs / quantity
• What is meant by total variable costs?


  The sum of all variable costs associated with each individual product you‘ve developed.
• What is the formula for total variable costs?


  total variable costs = cost per unit x quantity
• What is meant by average variable costs?


  Variable cost per unit produced.
• What is the formula for average variable cost?


  Average variable cost = total variable cost / quantity
• What is meant by average total cost?


  The sum of all production costs divided by total quantity of output. In other words, the average cost is the combination of total fixed and variable costs, which is divided by the total number of units that are produced by the firm.
• What is the formula for average total cost?


  average total cost = total cost / quantity
• What is meant by marginal costs?


  The cost added by producing one additional unit of a product or service.
• What is the formula of marginal costs?


  marginal costs = change in costs / change in quantity
• What is the difference between fixed costs and variable costs?


  Fixed costs don’t change with output but variable costs do change based on output.
• What are the main fixed costs?


  • rent
  • advertising
  • salaries
• What are the main variable costs?


  • raw materials
  • VAT
  • wages
  • distribution
• What is meant by diminishing returns?


  Addition of a variable factor to a fixed factor results in a fall of marginal product.
• What is meant by short run?


  At least one of the inputs is fixed (usually this is capital but can also be land).
• What is meant by long run?


  All FOP are variable and the scale of production can also change allowing the firm to benefit from economies of scale.
• What are long run curves associated with?


  Average costs
• What are short run costs associated with?

  Marginal costs
• Why is the MC rising in the short run?


  Due to diminishing returns.
• If price of raw materials increases, how will AC and MC shift?


  • AC shifts up - average costs are made up of fixed and variable costs
  • MC shifts up - marginal costs are made up of variable costs -> cost of an additional unit
• If a variable cost changes, what curves shift?

  MC and AC always
• if a fixed cost changes, what curves shift?


  only AC curve shifts
• Summarise the law of diminishing returns:


  As more units of a variable input are added to fixed amount of land and capital, the CHANGE in total output will FIRST RISE and then FALL (BECOME LESS).

  E.g. If more workers were added to the overcrowded factory, productivity suffered sue to law of diminishing returns.
• How is marginal product of labour defined?

  As the change in the level of output when a new employee is hired, given that all else remains constant.