Costs in the short run

• What are costs?

  The payments that firms make for the use of factors of production, such as rent and wages
• What is normal profit?

  A reward for risk taking included in costs, which represents the amount the risk taker must receive to keep resources in their current use
• What is total cost?

  The cost of producing a given level of output
• What are total fixed costs?

  Costs which don't change directly with ouput, such as the rent paid for a factory building
• What are total variable costs?

  Costs which vary directly with output, such as the wages needed to pay workers
• What is average cost?

  The cost per unit of output
• What is the formula for average cost?

  Total cost/quantity of output
• What happens to average costs for a firm?

  They initially decrease as more is produced because the fixed cost is spread out over more units of output
• What are average fixed costs?

  The fixed costs per unit per unit of ouput, and which are spread out as more is produced, meaning that fixed cost per unit decreases as output increases
• What is the formula for average fixed cost?

  Total fixed cost/quantity of output
• What are variable fixed costs?

  The variable costs per unit of output
• What is the formula for variable fixed costs?

  Total variable cost/quantity of output
• What is marginal cost?

  The cost to the firm of producing one more unit of output
• What is the formula for marginal cost?

  Change in total cost/change in quantity of output
• What happens to production when marginal cost is below average cost?

  Production will increase because the cost of producing the next unit is less than the average cost of producing a unit, though the average cost will not decrease more than the marginal cost
• What happens to production when marginal cost is above average cost?

  Production will decrease because the cost of producing the next unit is more than the average cost of producing a unit
• What is the law of diminishing returns?

  As more variable factors are added to fixed factors of production, the increase in output will eventaully decrease
• When is the law of diminishbing returns applicable?

  In the short run, because this is when at least one factor of production is fixed
• In the example of an apple farmer, what would be the fixed and variable factors?

  The fixed factor would be the orchard and the variable factor would be the workers
• What is total product?

  The total output of a firm in a given period of time
• What is average product?

  The unit of output produced per unit of a variable factor of production
• What is the formula for average product?

  Total product/quantity
• What is marginal product?

  The change in output resulting from employing one more unit of the variable factor
• What is the formula for marginal product?

  Change in total product/change in quantity
• What is the relationship between marginal product and average product?

  Marginal and average product increases the higher the quantity of labour until marginal product decreases and when it intersects with the average product curve, they both decrease, with the marginal product curve decreasing at a greater rate
• What is the relationship between marginal cost and average cost?

  Marginal and average cost decreases the higher the quantity of output until marginal cost increases and when it intersects with the average cost curve, they both increase, with the marginal cost curve increasing at a greater rate
• What is the general relationship between the cost curves and the product curves?

  They move in the opposite direction
• What is the relationship between short run and long run average cost curves?

  In the short run there are some fixed factors of production and so costs are determined by the law of diminishing returns, but in the long run all resources are variable and new production facilities can be built