3.2 Costs and Economies of Scale Flashcards
Explain Fixed Costs
Fixed costs are costs that the firm incur which will not change no matter how many goods are produced
For example: rent, taxes, salary, machinery
Explain Variable Costs
Variable costs are costs that the firm incur which change depending on the total number of goods produced.
For example: Materials, Delivery Fees, Packaging costs
Explain and Calculate Average Costs
Average costs is the total costs per unit or the cost of producing one unit.
AC = TC / Quantity Produced
Explain and Calculate Marginal Costs
The costs incurred by producing one unit of production. It is important as it helps a firm determine the most efficient level of production.
Marginal Revenue is the revenue received from selling the one extra unit of good that has been produced.
If the marginal cost is higher than the marginal revenue, the firm ends up losing money.
If the marginal cost is less than the marginal revenue, the producer still has potential to increase marginal revenue.
Therefore the optimal position for marginal cost is when MC = MR
To calculate Marginal costs:
△Costs / △Quantity
Explain short run in terms of fixed and variable factors of production
In the short run one factor at least one factor is fixed while other inputs are variable
Explain long run in terms of fixed and variable factors of production
In the long run all the factors of production are variable
Explain and Draw a diagram of The Law of Diminishing Returns
The graph is an ‘n’ shape
at the start of the upwards slope, every unit produced leads to a high level of profit or ‘return’.
As we go higher up the slope, it begins to taper off. This is the point of diminishing returns, where every additional unit will give a SLOWER GAIN in output or ‘return’.
Eventually we hit the point of maximum output. This is the point of negative returns. This is where every additional unit will give NEGATIVE RETURNS.
Explain and Draw a diagram for internal economies of scale
Measure a companys efficiency of production.
Occurs because of factors controlled by the internal management time.
Can be shown through an outward shift in PPC or shift right in supply curve
An example is a technical economy of scale which occurs when a large firm invests in high level machinery to automate production
Explain and draw a diagram for external economies of scale
Increases productive efficiency through third-party circumstances
For example: Tax reductions, Delivery fee reductions, govenrnment subsidies.
These can be shown through an outward shift in PPC or right shift in supply curve
Explain and draw a diagram for diseconomies of scale
A diseconomy of scale is when a firm is decreasing in its productive efficiency whilst output is increasing.
E.G. lack of communication through different departments, outgrowing your building, staff feeling less important and becoming unmotivated.
Explain and draw a diagram for minimum efficient scale.
Minimum Efficient Scale (MES) is the lowest level of output at which a firm can produce a good at a competitive price.
High MES = fewer firms (oligopoly / monopoly)
Low MES = more firms (monopolistic competition)
On a graph it is the lowest point of the u-bend for costs and output.
What are the causes of economies of scale
Large firms in competition with each other will prioritise economies of scale as it will lead to more profit.
- investment in technology
- Specialised workers
- Bonus incentives to workers and managers
- Government subsidies
- Less tax
What are the causes of diseconomies of scale.
DOS occur when as production output increases, average total costs are also increasing.
- Lack of communication through different departments
- Low incentivisation to workers
- Outgrowing your building / production space.
What are the effects of economies of scale
Economies of Scale are highly favourable by larger firms with high market share.
This is because they increase you productive efficiency by ensuring that costs of production are lower.
Since costs of production are lower, this leads to higher profits.
Higher profits lead to more reinvestment and higher dynamic efficiency.
What are the effects of diseconomies of scale.
Diseconomies of scale occur when the average total costs of production are increasing as output increases.
Since costs are increasing, this will lead to less profit being made,
Which will result in the firm having to decrease output down to the mes point where it is more efficient.
