Study Notes

# 4.1.4.4 Costs of production (AQA Economics)

Level:
A-Level
Board:
AQA

Last updated 16 Dec 2023

This AQA Economics Study Note covers costs of production

### Understanding Costs of Production

1. Difference Between Fixed and Variable Costs:Fixed Costs:

1. Definition:
• Fixed Costs are expenses that remain constant regardless of the level of production.
2. Example:
• Rent for a factory space remains the same, whether the factory produces 100 units or 1,000 units.

Variable Costs:

1. Definition:
• Variable Costs change with the level of production.
2. Example:
• The cost of raw materials increases as production volume rises; therefore, it is a variable cost.

2. Difference Between Marginal, Average, and Total Costs:

Marginal Costs:

1. Definition:
• Marginal Costs represent the additional cost incurred by producing one more unit of output.
2. Example:
• If producing 10 units costs \$100, and producing 11 units costs \$110, the marginal cost of the 11th unit is \$10.

Average Costs:

1. Definition:
• Average Costs are the total cost per unit of output.
2. Example:
• If producing 100 units costs \$1,000, the average cost per unit is \$10 (1000/100).

Total Costs:

1. Definition:
• Total Costs encompass all costs, both fixed and variable, incurred in the production process.
2. Example:
• If fixed costs are \$500 and variable costs for producing 100 units are \$1,000, the total cost is \$1,500.

### Difference Between Short-Run and Long-Run Costs:

Short-Run Costs:

1. Definition:
• Short-Run Costs include both fixed and variable costs, but some factors (like the size of the factory) are fixed.
2. Example:
• A bakery can increase production by hiring more workers in the short run, but it cannot build a larger facility immediately.

Long-Run Costs:

1. Definition:
• Long-Run Costs encompass all costs, and all factors of production, including the size of the facility, can be adjusted.
2. Example:
• The bakery can build a larger facility in the long run to accommodate increased production.

### Reasons for the Shape of Cost Curves:

Marginal Cost Curve:

1. U-Shaped Curve:
• Initially decreases due to increasing specialization, then increases due to diminishing returns.

Average Cost Curve:

1. U-Shaped Curve:
• Similar to the marginal cost curve, reflecting economies of scale and then diseconomies of scale.

Total Cost Curve:

• Due to the fixed costs that remain constant regardless of production level.

### How Factor Prices and Productivity Affect Costs:

Factor Prices:

1. Effect:
• Higher wages or costs of raw materials increase variable costs.
2. Example:
• If the price of steel rises, a car manufacturing company experiences an increase in variable costs.

Productivity:

1. Effect:
• Improved productivity lowers average and total costs.
2. Example:
• If a tech company adopts efficient software development practices, it may reduce the average cost per unit of software.

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