Econ Plus Dal: Fixed and Variable Costs

What is the short run?

When there is at least 1 fixed factor of production

What is the long run?

When all factors of production are variable

What are explicit costs?

Costs that require actual payment

What are implicit costs?

• For a business, is their opportunity cost

• The profit they could have made doing their next best alternative

What are fixed costs?

Costs that don’t vary with output

What are variable costs?

• costs that vary with output

• you pay more of these as you produce more

What are examples of fixed costs?

• Rent

• Salaries

• Interest on loans

• Advertising

• Business rates

What are examples of variable costs?

• Wages

• Utility bills

• Raw material costs

• Transport costs

Which are the only cost curves which have nothing to do with law of diminishing returns?

• total fixed cost

• average fixed cost

How to work out TFC?

• TC - TVC

Or:

• AFC x Q

How to work out AFC?

• TFC / Q

Or:

• AC - AVC

Draw diagram of AFC and TFC

How to work out AVC?

• TVC / Q

Or:

• AC - AFC

Draw AVC.

Why is the AVC shaped like a smiley face?

• due to law of diminishing marginal returns

• when we hire the 4th worker, diminishing returns kick in

• when labour productivity is falling & MP is falling, AVC will be rising