short and long run econ test

short run

the time period when at least one factor of production, usually capital, is in fixed supply (as at least one factor is fixed, the law of diminishing returns comes into effect)

long run

the period of time when it is possible to alter all factors of production

marginal product

the extra output from hiring an additional unit of the variable factor

average product

the average output per unit of the variable factor

the law of diminishing returns

states that as additional units of variable factor (e.g labour) are added to a fixed factor (e.g capital), the extra output (or MP) of the variable factor will eventually diminish. (note, the total output is still increasing, but at a diminishing rate)

assumptions of the law of diminishing returns

• at least one factor of production is fixed

• each unit of the variable factor is the same (for example, each worker is equally trained)

• the level of technology is held constant

economic cost of production

the opportunity cost of production

a fixed cost

a cost that doesn’t vary directly with output

a variable cost

a cost which varies directly with output

total cost =

fixed cost + variable cost

a semi-variable cost

a cost which contains within it a fixed cost element and a variable cost element e.g electricity

total costs

the sum of all costs involved with producing a given output

average costs (unit costs)

is the total costs divided by output (can be separated into average fixed cost (AFC) and average variable cost (AVC) in the short run

marginal cost

the additional expense a business incurs to produce one more unit of a good or service - calculated by change in total cost/ change in quantity

total revenue =

units of output sold x price

marginal revenue

the revenue gained from selling an additional unit of output

average revenue =

total revenue/ number of units sold