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# Costs of Production

TermDefinition
Short Run A period of time during which at least one factor of production is fixed in supply.
Long Run A period of time during which all the factors of production are variable in quantity.
Explicit Costs These are costs incurred by a firm when it pays an amount of money for something.
Implicit Costs These do not involve the paying out of money but should be considered.
Fixed Costs Do not change as output changes.
Variable Costs Costs that vary as the output changes.
Principal rule of conduct The maxim for all companies in the short run is to cover their variable costs and contribute to the reduction of their fixed costs.
Law of Diminishing Marginal Returns As more and more of a variable factor is added to a fixed factor, at some stage the increase in output caused by the last unit of the variable factor will begin to decline.
Average Cost (TC/Q) or (AFC+AVC)
Normal Profit This is the return that sufficiently rewards the risk-taking of an entrepreneur and it must be earned to stay in a business.
Average Fixed Cost Divide fixed cost by quantity.
Average Variable Cost Divide variable cost by quantity.
Average Total Cost Add AFC and AVC or divide total cost by quantity.
Marginal Cost Change in total cost divided by change in quantity. (As Marginal Cost increases so will Average Cost)
Shape of Short Run Average Cost (SAC) Curve Downward sloping id due to greater spread of FC + the specialisation and division of labour. Upward sloping is due to law of diminishing marginal returns.
The long run average curve(LRAC) is the minimum point of each SAC when joined together.
Created by: deborahh