Costs and diminishing marginal returns

What is the law of diminishing marginal returns?

As more units of a variable input are added to a fixed amount of land/capita, the change in total output will rise then fall

What is marginal product?

Change in output by increasing number of workers used by 1

What happens when DMR sets in?

The marginal product of labour begins to fall

What happens when marginal product of labour falls below existing average product?

Average product of labour will fall

What happens as more of a variable factor is added to a fixed factor?

A firm will reach point with disproportionate quantity of labour to capital, marginal product of labour will fall, raising marginal cost of getting product to market

What is an economic cost?

The opportunity cost

What is an imputed cost?

A resource that has an opportunity cost but for which no payment is paid

What is an opportunity cost?

The loss of other alternatives when one alternative is chosen

How is labour an imputed cost?

The time spent working to complete a job could’ve been spent working another. If worker earns $100 working, but could earn $50 elsewhere, $50 is the opportunity cost

How is financial capital an imputed cost?

If the start up cost of firm is 5000, the money could’ve been placed in a bank with 10% interest, so the opp cost is 500

How is physical capital/ depreciation an imputed cost?

The difference between purchase price and second hand value is an opp cost the firm has to cover

How is goodwill an imputed cost?

A firm may collect a reputation, which when the firm is sold, the buyer will have to cover the opportunity cost of this.

What is a fixed cost?

A cost that does not vary with output e.g. rent

What is a variable cost?

A cost that varies directly with output i.e. raw materials

What is a semi variable cost?

A factor that can vary, as a 9-5 wage is fixed, but overtime wages are variable

How do you calculate total cost?

Total fixed cost + total variable cost

How to calculate average cost?

Total cost/ quantity

How to calculate marginal cost?

Change in total cost / change in total output

How does the total cost curve look?

Horizontal straight line, showing TFC is constant

How does average fixed cost curve look?

Falls as output increases, as fixed cost represents decreasing proportion of total costs

How dos average variable cost and average total cost curves look?

They fall and then rise

How does the marginal returns curve look?

Falls then rises, as DMR sets in

When is average cost curve above MC curve?

When average cost is falling

When is average cost curve bel MC curve

When average costs are rising