Theory question 105
Theory of Costs and Revenue(a) Define production costs.
(b) Distinguish between real cost and explicit cost.
(c) With an example each, distinguish between fixed input and variable input.
(d) State any four types of short-run costs.
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(a) Production costs are all the expenses a firm incurs in producing goods and services (payments for factors and materials).
(b) Real cost is the opportunity cost of a choice – the next best alternative forgone; explicit cost is the actual money payment made to outsiders for factors and materials (e.g. wages, rent).
(c) A fixed input is one whose quantity cannot be changed in the short run, e.g. factory building, machinery; a variable input can be changed with output in the short run, e.g. raw materials, casual labour, fuel.
(d) Any four: total fixed cost; total variable cost; total cost; average fixed cost; average variable cost; average total cost; marginal cost.
Fixed inputs cannot be changed in the short run.