16 Costs and economies of scale Flashcards
fixed costs
costs that do not change with output
- total - stays the same
- average - reduces as spread over more units
Variable costs
changes as output changes
- total - increases as business produces more
- average - same as variable cost per unit
total costs
all costs incurred by a business
marginal costs
costs of producing one more unit
law of diminishing returns
in the short run when at least one factor of production is fixed the average eturn from s fsctor of production decreases
internal economies of scale
arise when a firm grows larger the firm has control over its own decisions
- purchasing
- technical
- marketing
- management
-financial
purchasing economies of scale
be able to negotiate a lower cost for purchasing raw materials and perhaps even capital items - bulk buying
technical economies of scale
business that is producing many products is likely to be able to buy better technology which can reduce average cost
marketing economies of scale
business that is producing more is likely to affd mass-marketing promotion - lower average cost per potential customer
management economies of scale
many small businesses cannot afford specialist managers whereas larger usinees can afford managers which are likely to be more efficient and therefore have a lower average cost
financial economies of scale
larger business negotiate lower financial costs, such as the rate of interest on a loan
external economies of scale
arise when an entire industry expands not just one business and the firm benefits
- technology and skill
- concentration
- infrastructure
technology and skill economies of scale
more people are likely to train to work that industry and other businesses are likely to develop better technology decreasing average cost
concentration economies of scale
as industry increases in size business within that industry may benefit from being close to one another
infrastructure economies of scale
as the industry in a particular area increases there is likely t be better transport and communication links benefiting all the businesses in that area