3.3.2.2 - costs

the law of diminishing returns

as variable inputs are added (eg. labour), marginal productivity increases as the extra inputs create more efficiency.

however, after a certain point, the variable inputs can actually decrease efficiency because they get in the way of fixed inputs (eg. capital) and the second variable input does not produce as much as the first.

therefore, DMR sets in and total product falls

what is the definition of total costs?

how much it costs to produce a given level of output

therefore, increased output = increased total costs

formula for total costs

total variable costs + total fixed costs

what is the definition of total fixed costs?

factors of production that do NOT vary with output - in the short run, at least one FOP cannot change

formula for total fixed costs

TFC = TC - TVC

what is the definition of total variable costs?

factors of production that DO vary with output - in the short run, ALL FOP can change

formula for total variable costs

Total variable costs = variable cost per unit x number of units sold

formula for average total costs

total costs / quantity produced

AVC + AFC = ATC

formula for average fixed costs

total fixed costs / qty

formula for average variable costs

total variable costs / quantity

what is the definition of marginal costs?

how much it costs to produce one extra unit of output

formula for marginal cost

change in total cost / change in quantity

relationship between marginal product & marginal cost

INVERSE - as MP increases, MC decreases. when MP reaches its highest point, MC will reach its lowest. vice versa is also true.

what is the definition of marginal product?

change in output from increasing the number of workers by one

how to calculate marginal product

change in total product/change in labour input

(find difference between first and second number in TP column)

what is the definition of average product?

measures output per worker employed OR output per unit of capital

how to calculate average product

total product/quantity of labour

relationship between average product and average cost

INVERSE - when AP rises, AC falls. vice versa is also true.

relationship between total product and total cost

INVERSE - when TP rises, TC falls. vice versa is also true. DMR sets in when TP falls and TC rises.

relationship between short and long run costs

in the short run, at least one cost is fixed. in the LR, all costs are variable.