3.2 costs/economies of scale Flashcards
Costs and economies of scale
Fixed costs
A cost unrelated to output
E.G rent
Variable costs
Costs which change with output
E.G raw materials, output increases leads to the need for more raw materials.
Average costs
The cost of production per unit
How to calculate average costs?
Total cost/
Quantity
Total cost
All the costs required to produce a good
How to calculate total cost?
TC = FC + VC
Marginal costs
The cost of producing one extra unit
How to calculate marginal costs?
The difference in producing the good before and the current good
Law of diminishing returns
Adding more of one FoP while all others are constant will lead to a lower output per unit.
More workers will eventually get in the way and slow down production.
Economies of Scale
Falling LRAC with increasing output
Internal economies of scale
Falling LRAC due to a firms growth / expansion
How are internal economies of scale achieved?
Optimising production
Using resources efficiently
External economies of scale
Falling LRAC due to growth / expansion of whole economy
How are external economies of scale achieved?
Increase in skilled labour
Improvements in infrastructure
Diseconomies of scale
When LRAC start to rise with output
Reasons for diseconomies of scale
Poor communication
Alienation
Lack of control
Reasons for economies of scale
Specialisation of labour
Technical improvements
Minimum efficient scale
Minimum point of output to achieve lowest LRAC
Causes of economies of scale
Specialisation / division of labour
Using full capacity
Bulk buying of materials
Low interest rates
Causes of diseconomies of scale
Poor communication
Alienation of workers
Lack of productivity from workers
Lack of control by managers over workers
Significance of economies of scale
Provides a competitive advantage over competition
Helps cost management
Makes products cheaper for consumers
Significance of diseconomies of scale
Competitors have the advantage in the market
High costs of production
Products are more expensive
