ib economics

2. LEARNING OUTCOMES
0 Explain the distinction between the short run & the
long run, with reference to fixed costs and variable
costs.
0 Distinguish between total costs, marginal costs (MC)
and average costs (AC)
0 Draw diagrams illustrating the relationship between
MC & AC, and explain the connection with production
in the short run

3. THE DISTINCTION BETWEEN THE
SHORT RUN AND THE LONG RUN
0 The distinction between short run and long run had
lead us to a distinction between fixed and variable
costs
0 Fixed costs: costs arise from the use of fixed inputs
0 Fixed costs do not change as output changes
0 Even if zero output, payments still have to be made
by the firm in the short run
0 Arise only in the short run

4. EXAMPLE OF FIXED COSTS
0Rental payments
0Property taxes
0Insurance premiums
0Interest loans

5. VARIABLE COSTS
0 Variable costs arise
inputs
from the use of variable
0 The costs vary as output increases or decreases
0 The more variable inputs a firm use, the greater
the variable costs
0 Example: WAGE
COSTS OF LABOUR
0 Firm hires more labour to increases output,
therefore has increased wage costs
0 TOTAL COSTS: FIXED + VARIABLE COSTS

6. AVERAGE COSTS
0

7. CALCULATE AVERAGE COSTS
0

8. MARGINAL COSTS
0

9. (1)
TP/Q
(2)
(3)
(4)
Labour TFC ($) TVC ($)
0
0
200
0
2
1
200
100
5
2
200
200
9
3
200
300
14
4
200
400
18
5
200
500
21
6
200
600
23
7
200
700
24
8
200
800
(5)
TC ($)
200
(6)
(7)
(8)
AFC ($) AVC ($) ATC ($)
-
-
-
(9)
MC ($)
-

10. COSTS CURVES & PRODUCT
CURVES

12. 0 Define a) fixed costs, b) variable costs and c) total
costs
0 Which is fixed and which are variable???
0 Insurance premiums on the value of the
property owned by a business
0 Interest payments on a loan taken out by
a business
0 Wage payments to the workers that are
hired by a firm
0 Payments of the purchase of seeds and
fertiliser by a business