Question

1-Explain total costs as the sum of total fixed and total variable costs.

2-Discuss the difference between short-run and long-run average total cost with examples.

Answer 1

1) Total cost is the sum of fixed and variable costs. Variable costs changes in accordence to the amount of a good or service which is being produced. The quantity of materials and labor which is needed to increases in direct proportion to the number of goods being produced. The cost “varies” in accordance to the production.

2) Short run- Short-term costs are collected in real time throughout the production process. Fixed costs do not affect short-term costs, only variable costs and revenues affect short-term production. Variable costs vary with output. Examples of variable costs include employee wages and raw material costs. Short-term costs increase or decrease based on variable cost and production rates.

Long run - Long-term costs accumulate when companies change product levels over time in response to a financial gain or loss. In the long run, there are no fixed parts of the product. Land, labor, capital goods and entrepreneurship are all long-term variations to produce goods and services.

Examples of long-term decisions that affect a company's costs include changing the size of the product, reducing or expanding the company, entering or leaving the market.