4.4

• Short run costs definition

  The time period in which at least one factor of production is fixed. Short run costs are made up of fixed costs and variable costs which fluctuate depending on how much is being made
• what are fixed costs?

  a cost of production, which in the short run, do not change with output - they stay the same even if nothing is produced
• examples of fixed costs

  rent, salaries, insurance
• what are variable costs?

  a cost of production which changes with the level of output, even in the short run - more production = higher variable costs
• what are total costs (TC)?

  all the costs incurred when producing a particular size of output - sum of fixed and variable costs
• what is the equation for total cost?

  total cost = total fixed cost + total variable cost
• what is average total cost (ATC) also known as average cost?

  total cost of producing a particular level of output, divided by the size of output
• what are the equations for average total cost?

  • ATC = TC / Q
  • ATC = AFC + AVC
• what is average fixed cost (AFC)?

  total cost of employing the fixed factors of production to produce a particular level of output, divided by the size of output - fixed cost per unit
• what is the equation for average fixed cost?

  AFC = TFC / Q
• long run costs definition

  all variable costs
• why do fixed costs not exist in the long run?

  economists argue that a firm can move seamlessly from one size of plant to another
• what is average variable cost (AVC)?

  total variable cost divided by the size of output - variable cost per unit
• what is the equation for average variable cost?

  AVC = TVC / Q
• what is marginal cost (MC)?

  addition to total cost resulting from producing one additional unit of output
• what happens to marginal cost when marginal returns fall?

  MC rises because it’s becoming less efficient to produce extra units. diminishing returns - rising MC
• what does the MC curve look like ?

  • Nike tick shape
  • first is falls (increasing returns)
  • then rises (diminishing returns)
• where does the MC curve cut the ATC and AVC curves?

  • MC cuts both ATC and AVC at their lowest points
  • this is because MC is below average, it puls the average down - and when its above, it pushes te average up
• what is the long-run average costs (LRAC) curve?

  shows the lowest possible average cost when all factors of production are variable - its U-shaped because of economies and diseconomies of scale
• why is understanding costs important for firms?

  • to set prices
  • make production decisions
  • stay profitable
  • compete in markets
• according to the law of diminishing returns, after a point, marginal costs rise as output increases