Cost and Revenue Concepts

1. Short Run vs Long Run

• Short run refers to a time period when a firm has both variable and fixed inputs.

• Long run refers to a time period when all inputs of a firm are variable and there are no fixed inputs.

• In the shirt run, a firm cannot alter the current size of the factory, cannot obtain new equipment overnight to increase its output.

• In the long run, a firm can increase its output by building more factories.

2. Costs and Revenue Terms

• Total costs: sum of fixed and variable costs

• Marginal costs: cost of producing one additional unit of good

• Average costs: total cost of production divided by the total output

• Total revenue: total sum received from selling certain units of output

• Marginal revenue: revenue derived from the sale of one additional unit of good sold

• Average revenue: total revenue divided by total output

3. Relationship between Average and Marginal costs/revenues

4. Law of Diminishing Marginal Returns

• The Law of Diminishing Marginal Returns states that as additional units of a variable input, such as labor, are added to a fixed input, like land or capital, the additional output (marginal product) will eventually decrease, assuming other factors remain constant. Initially, output rises due to better utilization of resources, but beyond a certain point, inefficiencies arise, and productivity declines. This principle applies in the short run and highlights the limitations of expanding production with fixed resources. It is commonly observed in agriculture, manufacturing, and services, where overuse of inputs reduces efficiency. However, it assumes constant technology and input quality, which may not always be realistic.

To deepen your understanding of cost and revenue concepts, try applying these ideas to real-world scenarios. For example, analyze how businesses in Singapore, such as small manufacturing firms, manage fixed and variable costs in the short run and expand their production capacity in the long run. Practice calculating average costs, marginal costs, and revenues using hypothetical data. Engaging with A Level econs questions on these topics will also strengthen your analytical skills, especially in interpreting the relationship between marginal and average concepts.

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