Fixed/Variable Costs

• Short-run


  A period of time when there is at least one fixed factor of production
• The short-run is not defined in terms of six months or one year, it is defined in terms of the variability of factors of production</b>
• Factors of production in the short-run

  • Land
  • Capital
• In the long-run, all factors of production are variable
• Explicit costs


  Costs that require actual payment
• Implicit costs


  Opportunity cost, the profit a business could have made doing their next best alternative
• Explicit costs


  • Fixed costs
  • Variable costs
• Fixed costs


  Costs that do not vary with output
• Variable costs


  Costs that vary with output
• Total fixed costs


  Constant, does not vary with output
• Average fixed cost


  Total fixed costs divided by quantity
• Total fixed costs and average fixed cost

  • Their shapes have nothing to do with the law of diminishing returns
• Average variable cost


  Total variable costs divided by quantity
• How average variable cost is shaped

  1. Increasing returns to labour initially, reducing average variable cost

  2. Law of diminishing returns kicks in, reducing marginal product and increasing average variable cost
• The average variable cost curve is shaped like a smiley face due to the law of diminishing returns
• Total variable cost and marginal cost will be covered in a later video