Cost of Production: Concepts and Cost Curves: 20 flashcards
All 20 flashcards from this kit, free and with no sign-up.
1. In economics, what does 'cost' mean?
Show the answer
The value of all inputs used in production, including implicit (opportunity) costs — not just money paid out.
2. Explicit cost vs implicit cost
Show the answer
Explicit = actual payments made (wages, rent, raw material). Implicit = opportunity cost of self-owned resources (owner's labour, own land, own capital).
3. How is economic profit calculated?
Show the answer
Economic profit = Revenue − (Explicit costs + Implicit costs).
4. What does 'normal profit' mean?
Show the answer
Normal profit is earned when economic profit is zero — the firm covers all opportunity costs, including implicit ones.
5. Define the short run in production theory.
Show the answer
A period in which at least one factor of production (usually capital) is fixed and cannot be varied.
6. Define the long run in production theory.
Show the answer
A period in which all factors of production, including capital, can be varied.
7. What is Total Fixed Cost (TFC)?
Show the answer
The cost of fixed factors; it is constant at all output levels and is incurred even when output is zero.
8. What is Total Variable Cost (TVC)?
Show the answer
The cost of variable factors; it is zero at zero output and rises as output rises, first at a decreasing rate then at an increasing rate.
9. State the relationship TC = TFC + TVC.
Show the answer
Total Cost is the sum of Total Fixed Cost and Total Variable Cost; at zero output, TC = TFC because TVC = 0.
10. Formula for Average Fixed Cost (AFC)
Show the answer
AFC = TFC ÷ Q. It falls continuously as output rises and is a rectangular hyperbola — it never touches either axis.
11. Formula for Average Variable Cost (AVC)
Show the answer
AVC = TVC ÷ Q. It is U-shaped.
12. Formula for Average Cost (AC)
Show the answer
AC = TC ÷ Q = AFC + AVC. It is U-shaped.
13. Formula for Marginal Cost (MC)
Show the answer
$MC = \Delta TC / \Delta Q = \Delta TVC / \Delta Q$, because TFC does not change.
14. At what point does the MC curve cut the AC curve?
Show the answer
MC cuts AC at the minimum point of AC — where AC stops falling and starts rising.
15. If MC < AC, what happens to AC?
Show the answer
AC is falling. When MC > AC, AC is rising; when MC = AC, AC is at its minimum.
16. Why are AC and MC curves U-shaped?
Show the answer
Because of the law of variable proportions — diminishing marginal returns cause costs per unit to first fall and then rise.
17. Short-run shutdown condition
Show the answer
A firm shuts down in the short run if price falls below minimum AVC, because it must still pay TFC.
18. Long-run exit condition
Show the answer
A firm exits in the long run if price falls below minimum AC.
19. Why is TVC zero at zero output but TC is not?
Show the answer
No variable inputs are used at zero output, so TVC = 0; but fixed costs are still incurred, so TC = TFC > 0.
20. What shape does the AFC curve have?
Show the answer
A rectangular hyperbola that falls continuously and never touches either axis — AFC never becomes zero.
Your notes can be a kit like these
Every kit here was made from real study material. Point Veda at a chapter, a PDF, a photo or a link and get notes, flashcards, practice MCQs, games and a scored test — free, in 42 languages.
- Chapter notes
- Flashcards
- Practice MCQs
- Scored tests
- Exam prep
Get Veda free See what students get
Free to start · No ads · Works in 42 languages