3.3- revenue, costs and profits

def short run

A period of time where there is at least 1 fixed factor of production

explain law of diminishing returns

in the short run, when variable factors of production are added to a stock of fixed factors of production (e.g: land + capital) , total/marginal product will initially rise and then fall

reasons for AP + MP curve

1. adding labour → initially: more specialisation + unused capacity being utilised → output per worker rises → MP rises

2.eventually: fixed factors utilised→ workers have to share capital → output per worker falls → MP falls

def long run

all factors of production are variable

what is an implicit cost?

the opportunity cost - the profit they could have made doing their next best alternative

def fixed cost + example

costs that do not vary directly with level of output

e.g = rent , salaries,

def variable costs

costs that do vary with output

e.g = wages of employees paid by the hour, cost of electricity + gas (utility bills)

def marginal cost

the cost of producing one additional unit of output

def average cost

total cost divided by quantity produced

formulae for AC

TC / Q

formulae for MC

/_\TC divided by /_\Q

why is does the MC have its shape?

• slopes down at first = increasing labour productivity→ increasing MP (due to specialisation + underutilisation of fixed factors of production) → the increase of MP decreases MC

  • labour productivity decreases, MP decreases → due to fixed factors of production becoming a constraint on production → MC will rise