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
