Production & Costs Terminology

Costs

Defined as expenses incurred by the firm in the production process of goods & services

What are the two types of factors of production?

• Variable factors of prod

• Fixed factors of prod

Define fixed factors of prod.

They are the factors that cannot be increased within a given time period.

Fixed factors —> leads to fixed costs (TFC) which do not change with output

Examples of fixed factors of production 

Land, factories, shop space & machinery

Implication of fixed factors of prod on firms

Firms cannot increase the amount of land or size of the factories in the immediate time period

Define Variable Factors of Production

They are the factors of production that can be increased within a given time period

Variable Factors —> leads to variable costs (TVC), which rise with output 

Examples of variable factors of prod.

Labour, raw materials

Implication of variable factors of prod on firms

Firms can quickly increase the supply of labour by employing workers to work overtime

What does the difference between fixed & variable factors of production represent? 

Shows why we study costs differently in the short and long run

• short run — some inputs fixed, some variable 

• long run — all inputs are variable & no fixed factors