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Study Notes Costs of production (AQA Economics)


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:

  1. Rises Steadily:
    • 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.


  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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