types of cost

• • Total product is the total output a firm produces within a given period, utilising given inputs.
  • Total product = Average product x labour
• Average product, output per unit of inputs of variable factors.
• Marginal product is the addition of variable factors to the total product
• • The Law of Diminishing Returns (law of variable proportions) is where the output from an additional input unit leads to a fall in the marginal product.
• • Fixed Costs: Those costs are independent of output in the short run, so they are a straight line and don’t change with output.
• • Variable Costs: those that vary directly with output; all costs are variable in the long run, so the graph is curved and changes with output
• • Total cost = total fixed cost + total variable cost. It starts at the fixed cost line and follows the variable cost line, since it combines both.
• Isoquant: a curve that shows a particular output level over a combination of inputs. It is similar to the indifference curve. Output refers to the total physical product.
• Optimum Output: most efficient output at the lowest unit cost. Production efficiency in the short run
• • Increasing returns to scale: where output increases proportionately faster than the increase in factor inputs.
• • Decreasing returns to scale: where factor inputs increase at a proportionately faster rate than the increase in output.
• • Minimum Efficient Scale: lowest level of output at which costs are minimised.
  • Low MES leads to a fragmented market, and high MES levels lead to a natural monopoly.
• • Economies of Scale - the benefits gained from falling long-run average costs as the scale of output increases.
• • Internal Economies of Scale: a long run result of a decision to produce on a larger scale.
  • The principal advantage for a firm benefiting from economies of scale is a reduced cost per unit produced.
• External economies of scale: cost-saving accruals to all firms in an industry as the scale increases.
• • Normal Profit: a cost of production that is just sufficient for the firm to keep running in the same industry
• Subnormal Profit: any profit less than the normal profit. If the problem persists, then the firm will leave the industry and go into one that will make a profit.
• Supernormal Profit: any profit in excess of normal profit. It only exists in the short term and only for monopolies,