fixed and variable costs (AFC, TFC, AVC)

• The short-run is defined as a period of time when there is at least one fixed factor of production
• Land and capital are usually fixed factors of production in the short-run
• What is the defining characteristic of the long-run in terms of factors of production?

  All factors are variable
• Explicit costs are costs that require actual payment
• What is the implicit cost of a business?

  Opportunity cost
• Fixed costs do not vary with output
• What are examples of fixed costs for a business?

  Rent, salaries, loan interest
• Wages are a variable cost because they depend on the level of output
• Variable costs increase as output rises
• What are examples of variable costs for a business?

  Wages, utility bills, raw materials
• The shapes of total fixed cost and average fixed cost curves are influenced by the law of diminishing returns

  False
• What is the shape of the total fixed cost curve?

  Constant
• Average fixed cost is calculated by dividing total fixed cost by output
• The average fixed cost curve slopes downward because output increases while total fixed cost remains constant
• Steps in calculating average variable cost using the numerical example provided

  1️⃣ One worker is hired, TVC is 100, output is 10, AVC is 10

  2️⃣ Two workers are hired, TVC is 200, output is 30, AVC is 6.67

  3️⃣ Three workers are hired, TVC is 300, output is 70, AVC is 4.28

  4️⃣ Four workers are hired, TVC is 400, output is 80, AVC is 5

  5️⃣ Five workers are hired, TVC is 500, output is 85, AVC is 5.88
• What is the shape of the average variable cost curve?

  U-shaped
• The average variable cost curve is shaped due to the law of diminishing marginal returns
• When marginal product increases, average variable cost decreases
• What happens to average variable cost when diminishing returns kick in?

  It starts to rise