costs of production

what is the main difference between the short run and long run in production? (FOP)

in the short run, at least one factor of production cannot change, while in the long run, all factor inputs can change.

what are fixed costs?

costs that do not vary with output, such as rents, advertising, and capital goods.

what are variable costs?

costs that change with output, such as the cost of raw materials.

how is total cost calculated?

total costs = total variable costs + total fixed costs.

how is average cost calculated?

average costs = total costs / quantity produced.

what is marginal cost?

the cost of producing one extra unit of output.

what does the law of diminishing returns state?

after a certain point, marginal costs rise as output increases.

describe the shape of the short run average total cost curve and why

U-shaped due to diminishing returns.

what happens to average costs in the long run as output increases initially?

AC fall due to economies of scale.

what occurs after the optimum level of output in the long run?

AC rise due to diseconomies of scale.

how do factor prices affect firms' costs of production?

if factor inputs become more productive, firms can produce more output with smaller inputs, resulting in lower unit costs.

what might firms do if the average cost per unit of a factor input rises?

firms are likely to switch to cheaper and generally more productive factor inputs.

what is an example of a fixed cost?

rent for a factory.

what is an example of a variable cost?

cost of raw materials used in production.

what does the short run average total cost curve illustrate?

it illustrates how average total costs behave when at least one factor of production is fixed.

what is the significance of the optimum level of output?

It is the point where average costs are at their lowest before they start to rise.

why do marginal costs start to increase in the short run?

employing more resources becomes less productive, leading to decreased marginal output.

what is the relationship between productivity and unit costs of production?

higher productivity leads to lower unit costs of production.

how does the production process differ between the short run and long run?

in the short run, production processes are limited by fixed factors, while in the long run, firms can adjust all inputs.

what is the impact of economies of scale on average costs?

economies of scale lead to falling average costs as output increases.

what is the impact of diseconomies of scale on average costs?

diseconomies of scale lead to rising average costs after reaching the optimum output level.