Cambridge International AS and A Level Economics: Short-run production and costs (9708) – Revision Notes

These notes condense sections 7.5.1 and 7.5.2 of the Cambridge International AS & A Level Economics 9708 syllabus for examination in 2026, 2027 and 2028. This is A Level content (topics 7 to 11), not examined at AS. For full explanations and the bakery tables, read the study guide. Then try the practice questions. The course hub, the checklist and the free 10-minute diagnostics show what else to revise. All figures here are invented and illustrative; money is in currency units (cu).

Key definitions

Term	Meaning
Short run	A period in which at least one factor of production is fixed
Fixed factor	Cannot be changed when output changes in the short run
Variable factor	Can be changed to alter output in the short run
Total product (TP)	Total output from a given quantity of the variable factor
Average product (AP)	Output per unit of the variable factor
Marginal product (MP)	Extra output from one more unit of the variable factor
Law of diminishing returns	Beyond some point, each extra unit of a variable factor combined with fixed factors adds less output than the one before
Fixed costs (FC)	Costs that do not change with output in the short run
Variable costs (VC)	Costs that change with output
Marginal cost (MC)	Extra cost of producing one more unit

Formulas

Measure	Formula
AP	TP / units of variable factor
MP	Change in TP / change in variable factor
TC	TFC + TVC
AFC	TFC / Q
AVC	TVC / Q
ATC (AC)	TC / Q, or AFC + AVC
MC	Change in TC / change in Q
MC with one variable factor	Price of that factor / MP
AVC with one variable factor	Price of that factor / AP

Method: from a production table to a cost table

1. Find MP for each row: this TP minus the last TP.
2. Find AP: TP divided by the number of workers.
3. TVC = workers x wage. TC = TFC + TVC.
4. Divide each of TFC, TVC and TC by Q to get AFC, AVC and ATC.
5. MC = change in TC divided by change in Q for the same step.
6. Check: AFC + AVC should equal ATC (allow for rounding).

Production shapes in one paragraph

MP rises while specialisation helps, then falls once the fixed factors get crowded. That turning point is the start of diminishing returns. AP rises while MP is above it and falls when MP is below it, so MP cuts AP at the top of AP. TP rises throughout while MP is positive.

Cost curve shapes in a table

Curve	Shape	Reason
AFC	Falls throughout, never touches the axis	Same TFC spread over more output
MC	Falls, then rises	Mirror of MP: increasing then diminishing returns
AVC	U-shaped	Mirror of AP
ATC	U-shaped, minimum to the right of AVC’s	AFC still falling when AVC turns up

MC cuts AVC and ATC at their minimum points, from below. Below the average, MC pulls the average down. Above it, MC pulls it up.

Worked reminder: a small laundry

Country B has a laundry with TFC of 90 cu. Output is in batches.

Q	TVC	TC	AFC	AVC	ATC	MC
1	50	140	90.00	50.00	140.00	50
2	85	175	45.00	42.50	87.50	35
3	115	205	30.00	38.33	68.33	30
4	155	245	22.50	38.75	61.25	40
5	215	305	18.00	43.00	61.00	60

MC is lowest at the third batch (30). AVC is lowest at 3 batches (38.33) and then rises, because MC (40) is above AVC (38.33) from the fourth batch. ATC is still falling at 5 batches because MC (60) is below ATC at 4 batches (61.25).

Worked reminder: product in a repair shop

A repair shop in Country C has one workbench (fixed). The figures are invented.

Workers	TP (repairs per week)	AP	MP
1	10	10.0	10
2	26	13.0	16
3	38	12.67	12
4	44	11.0	6

MP is highest for the second worker, so diminishing returns begins with the third worker (MP falls from 16 to 12). AP peaks at 2 workers (13.0) and falls once MP (12) is below it. If each worker earns 55 cu per week, the third worker’s MC is 55 / 12 = 4.58 cu per repair and AVC with three workers is 165 / 38 = 4.34 cu. MC is above AVC, so AVC is already rising at 3 workers.

A paragraph to learn: how diminishing returns shapes costs

The firm has a fixed factor, so extra workers share it. At first they specialise and MP rises, which pulls MC and AVC down. After the turning point each worker adds less than the one before. The wage is unchanged, so the cost per extra unit rises and MC turns up. Once MC passes AVC, AVC rises. Once MC passes ATC, ATC rises. Fixed costs have no effect on MC at all.

What shifts which curve

Change	Curves that move
Higher rent (fixed cost)	TFC, AFC, TC, ATC up. TVC, AVC, MC unchanged
Higher wage (variable cost)	TVC, AVC, ATC, MC up (and TC)
Technology that raises MP	MC and AVC down (and ATC)

Reading a diagram in an answer

When a question gives a cost diagram, work through it in this order:

1. Name the axes: cost (cu) per unit on the vertical axis and output on the horizontal axis.
2. Find the lowest point of MC, then the lowest point of AVC, then the lowest point of ATC. They run in that order from left to right.
3. Check that MC passes through each average curve at its lowest point.
4. Read the vertical gap between ATC and AVC at any output. That gap is AFC.
5. To find TC at an output, multiply ATC by Q. To find TVC, multiply AVC by Q.

Must-know distinctions

• Diminishing returns versus falling output. Returns diminish when MP falls. Output falls only when MP is negative.
• Average versus marginal. Average is the total divided by Q. Marginal is the cost of the last unit.
• AC and ATC. The syllabus uses both for the same measure.
• Fixed factor versus fixed cost. A fixed factor (the oven) creates a fixed cost (its rent).
• Short run versus long run. Diminishing returns is a short-run law because it needs a fixed factor.

Quick self-test

1. Define a fixed factor of production.
2. A workshop produces 60 units with 4 workers. Calculate AP.
3. When a fifth worker is hired, TP rises from 60 to 72. Calculate MP.
4. ATC is 8 cu and AFC is 2.5 cu. Calculate AVC.
5. At 30 units, AVC is 5.5 cu. Calculate TVC, and TC if ATC is 8 cu.
6. TC rises from 250 cu to 268 cu as output goes from 20 to 26 units. Calculate MC.
7. The wage is 30 cu and MP is 6 units. Calculate MC.
8. Which of AFC, AVC, MC and ATC are unaffected by a rise in rent?
9. Why does AFC never rise as output increases?
10. When MC is above ATC, what happens to ATC?
11. Explain why MC rises when diminishing returns sets in.

Answers

1. A factor whose quantity cannot be changed as output changes in the short run, such as a factory building.
2. AP = 60 / 4 = 15 units per worker.
3. MP = 72 - 60 = 12 units.
4. AVC = 8 - 2.5 = 5.5 cu.
5. TVC = 5.5 x 30 = 165 cu. TC = 8 x 30 = 240 cu.
6. MC = (268 - 250) / (26 - 20) = 18 / 6 = 3 cu per unit.
7. MC = 30 / 6 = 5 cu per unit.
8. AVC and MC. AFC and ATC both rise because TFC rises.
9. TFC is constant, so dividing it by a larger Q always gives a smaller figure.
10. ATC rises, since the extra unit costs more than the existing average.
11. Each extra worker adds less output but is paid the same wage, so the cost of each extra unit of output goes up.

Where marks are usually lost

• Calling a fall in MP a fall in output.
• Dividing by the wrong quantity. AP and MP are per worker; AFC, AVC and ATC are per unit of output.
• Finding MC by dividing TC by Q.
• Drawing AFC as U-shaped, or MC as cutting ATC at the minimum of MC.
• Forgetting that ATC reaches its minimum at a higher output than AVC.
• Describing the rising part of MC without linking it to MP.
• Shifting MC when only fixed costs change.
• Using the long-run idea of all inputs rising in a short-run answer.
• Stating fixed costs as “costs that are always the same”, leaving out “in the short run”.

Official syllabus

Cambridge International AS & A Level Economics 9708 syllabus for examination in 2026, 2027 and 2028, published by Cambridge University Press & Assessment, sections 7.5.1 and 7.5.2.