Fixed and Variable Costs (AFC, TFC, AVC) Year 2 Micro (2)

Long-run

When all factors of production are variable

Implicit Costs

Just opportunity cost, the profit they could have made doing there next best alternative

Explicit Cost

Costs that require actual payment, e.g. fixed cost (have to be paid, and do not vary with output): rent, salaries, interest on loans. variable costs(pay more as you produce more): wages, utility bills, raw material costs, transport cost.

Total fixed Cost

Nothing to do with law of diminishing returns. Fixed costs that do not vary with output, so is just constant on a graph. TFC= TC - TVC

Average Fixed cost

Nothing to do with law of diminishing returns. AFC = TFC/Q, if Q is rising the AFC will fall as you produce more.

Average Variable Cost

Is shaped due to the law of diminishing returns. There is one variable costs e.g. wages (1 worker at £100 produces 10 units). AVC = TVC/Q. Looks like smiley face. Up to a point there is an increasing returns of labour, labour productivity rises, marginal product is rising and that is reducing AVC. But then law of diminishing returns kicks in when more workers employed, and AVC starts to rise again