3.3.2 Costs

• The ATC curve is typically U-shaped due to economies and diseconomies of scale.
• What are the two types of costs in economics?

  Explicit and implicit costs
• Explicit costs involve direct payments for factors of production
• Opportunity cost is the value of the next best alternative use of resources.
• What is the Total Cost (TC) the sum of?

  TFC and TVC
• The formula for TC is TFC + TVC
• Total Fixed Costs (TFC) do not change with production levels.
• In economics, costs include all expenses incurred by a firm in producing goods or services
• What are fixed costs?

  Costs that don't change
• Variable costs remain constant regardless of production levels

  False
• The additional cost of producing one more unit is called marginal cost.
• Match the economic concept with its description:

  Opportunity Cost ↔️ Value of next best alternative

  Accounting Cost ↔️ Direct payments for inputs

  Economic Cost ↔️ Includes implicit costs
• If a business owner invests £50,000 instead of earning 5% interest in a bank, the opportunity cost is £2,500
• What are explicit costs?

  Direct payments for inputs
• Total cost is the sum of total fixed costs and total variable costs
• Total fixed costs change with the level of production

  False
• What happens to total variable costs as production increases?

  They increase
• Arrange the following cost types from most general to most specific:

  1️⃣ Total Cost

  2️⃣ Fixed Costs

  3️⃣ Average Fixed Costs
• What are the fixed costs for a business paying £1,500 in rent and £500 for insurance?

  £2,000
• Variable costs are expenses that vary directly with the level of production
• Variable costs fluctuate with the quantity of goods or services produced
• What is the formula for variable costs?

  $VC =$$\text{Cost per Unit} \times \text{Quantity}$
• If a furniture company spends £25 on materials per chair and produces 200 chairs, the variable costs are £5,000
• What does average total cost (ATC) represent?

  Cost per unit produced
• The formula for calculating average total cost is ATC = TC / Q.
• The variable cost for producing 200 chairs at £25 per chair is £5,000
• Fixed costs remain constant regardless of production levels.
• Average Total Cost (ATC) is the total cost of production divided by the quantity of output
• What is the formula for calculating Average Total Cost (ATC)?

  $ATC =$$\frac{TC}{Q}$
• Average Total Cost (ATC) combines Average Fixed Cost (AFC) and Average Variable Cost (AVC) using the formula $ATC =$$AFC +$$AVC$
• Steps in the relationship between ATC and other cost concepts

  1️⃣ ATC is derived from Total Cost (TC)

  2️⃣ ATC includes Average Fixed Cost (AFC), which decreases as output increases

  3️⃣ ATC includes Average Variable Cost (AVC), which may vary with production efficiency
• Explicit costs involve direct payments for factors of production.
• Opportunity cost is the value of the next best alternative use of resources
• Match the cost type with its definition:

  Explicit Costs ↔️ Direct payments for factors of production

  Implicit Costs ↔️ Opportunity costs of using firm's own resources
• Total Cost (TC) is the sum of Total Fixed Costs (TFC) and Total Variable Costs (TVC), defined by the formula TC = TFC + TVC</latex>
• Total Fixed Costs (TFC) do not change with the level of production.
• Fixed Costs (FC) are expenses that do not change with the level of production
• What are examples of fixed costs?

  Rent, insurance, salaries
• Fixed costs and variable costs together make up total cost.
• Variable Costs (VC) are expenses that vary directly with the level of production