Cost Curves Economics

Cost Curves Economics

1. Law of Diminishing Returns

   • Definitions
     • Diminishing Returns
       • When a producer adds variable factors of production to a fixed factor leading to a rise in output but at a decreasing rate
     • Average Revenue
       • The same as price This is also known as a demand curve  (think about what DC represents)
     • Long/Short Run
       • All factors of production can be changed in the long run. In SR some variable factors may change, no change in fixed factors
     • Marginal Physical Product
       • The change in total output by increasing units of labour by 1
   • When does it set in?
     • Marginal Output/MPP
       • When we MPP reaches its peak and starts to fall with next unit of output, is when DR sets in
       • For marginal cost when it has reached its lowest and starts to rise again, is when DR kicks in

2. Cost Types

   • Fixed Cost
     • Costs that do not change regardless of output
   • Variable Costs
     • These costs can change depending on output
   • Marginal Costs
     • Change in total costs by increasing output by 1
   • Average Costs
     • The cost per unit of good

3. Curves Relationships

   • AC and MC
     • When MC>AC both are rising
     • When AC>MC, MC will fall and then rise

4. Profits

   • This is the difference between total revenue and total costs
   • Types
     • Normal
       • The amount of profit a firm needs to ensure they FOP in current use
     • Supernormal
       • Also known as: Abnormal Pure Economic
       • Anything above normal profits
   • MC=MR
     • When MC =MR, profits cant be further maximised
       • When MR>MC, there's still a possibility that a firm will gain extra profit by increasing output
       • When MC> MR then total profits will go down for each extra unit produced, so firms won't output more