3.3.2 Costs + 3.3.3 Economies of Scale Flashcards
what does short run and long run mean in production?
- short run: period of time where at least one factor of production is fixed (limited to a single speace-land/machine-capital)
- long run: period of time where all factors of production are variable
- specfic firm varies for each firm: time need for all factors of production to become variable (time needed to make rocket space pads different to restuarant ovens)
what are the types of costs in the short run?
- fixed costs
- variable costs
what are the types of costs in the long run?
all factors become variable
only varaiable costs in the long run
what is difference between variable and fixed costs?
only applies to the short run
- variable costs: cost which varies with ouput
- fixed: do not vary
what is the difference between wages and salaries?
- wages are paid per hour (variable)
- salares are paid anaually (fixed per year)
what is the average fixed cost formula?
and graph representation
total Fixed Costs/ Quantity
TFC/Q
* always decreasing becuase fixed cosst are spread across more units
never reachest zero, always falling curve
what is the formula for total cost?
and graph representation
Total cost = Total Variable Cost + Total Fixed Cost
TC = TVC + TFC
straight line graph
what is marginal cost?
the additional cost of producing one extra unit
what is the formula for marginal costs ?
Δ Total costs/ Δquantity
what happen to marginal cost as productivity increases?
decrease in marginal costs
inverse relationship
what is the law of diminishing marginal returns?
in the short run as more factors of production are employed, productivity will evetually diminish
initially worker can specicialise and productiity increases
what is the marginal cost curve in the short run?
and graph shape
- productivity initially increases, marginal costs decrease because of specialsiation
- then as productivity decreases, marginal costs increase because of diminishing marginal returns
nike tick shape
draw the AVC and MC curves
intially MC draws AVC down, then pulls it up
AVC intersects MC at it’s lowest point
what are the 2 average total cost formulas?
- ATC= TC/Q
- ATC= AVC+ AFC
Draw the average total cost curve
will intersect MC at it’s lowest point
what is the long run average cost curve?
derived from the short run average cost curve
what is internal economies of scale?
reduces long average run costs as a firm increases production
what are the 6 types of inetrnal economies of scale?
- Risk Bearing economies of scale
- Managerial economies of scale
- Financial economcies of scale
- Purchasing economies of scale
- Technical ecnonomies of scale
- Marketing economies of scale
Richards mum flies past the moon
what is purchasing economies?
(bulk buying)
1. as firms expand they can bulk buy raw materials
2. allowing them to negotiate lower prices
3. reducing costs
what is technical economies of scale?
big firms invest in specialsit capital, increasing productivity, decreasing their LRAC
can only exploit when firms are big
What is managerial economies?
when big firms hire specialist staff, increasing productivity, decreasing LRAC
what is marketing economies of scale?
when big firms spread out their marketing costs across the high number of units that they sell, decreasing LRAC
eg: nike coca cola
what is finanicial economies of scale?
as firms expand and grow bigger they make more sales and revenue so it is less risky so banks offer them a lower intrest rate, reducing repayment costs, reducing LRAC
what is risk bearing economies of scale?
using profits to diversify in different sectors, reducing the cost of failure in one sector
eg virgin diversifiying in 400 different areas
what is internal diseconomies of scale ?
when LRAC inrease as a firm expands
what are the three reasons for internal diseconomies of scale?
- allienation
- buracrecy
- communication
abc
what is allienation?
workers feel very allientated, a reduction in employees motivation, decreasaing firm’s productivity, increasing LRAC
eg: call centres
what is bureaucracy?
spendning on managers, paperworks filling and secretaries that a firm has to pay for when it expands , increasing LRAC
what is a minimum efficent scale?
the point on the LRAC curve where a firm first reaches it’s lowest LRAC
show internal economies of scale, diseconomies of scale and minimum efficent scale on a LRAC curve
what is external economies of scale?
- when a firm’s LRAC decrease as industry output increases
- eg: if industry is expanding it is easier to find specialsied workers (software engineers) so recruitment costs decrease, decreasing LRAC
- eg: knowledge transfers, decraesing production costs
what is the difference between external economies of scaleand internal economies of scale?
- internal: when a firm increases it’s own output, movement along LRAC curve
- external: when an industry increases it’soutput, shift of LRAC curve
show external economies of scale on LRAC curve
- cause shift of curve
Why does bad communication lead to internal diseconomies of scale?
More challenging to co ordinate effectively amongst departments and teams. This leads to delays and errors which can increase LRACs
