3.3.2 Costs + 3.3.3 Economies of Scale

Question 1

what does short run and long run mean in production?

Answer 1

• 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)

Question 2

what are the types of costs in the short run?

Answer 2

• fixed costs
• variable costs

Question 3

what are the types of costs in the long run?

Answer 3

all factors become variable
only varaiable costs in the long run

Question 4

what is difference between variable and fixed costs?

only applies to the short run

Answer 4

• variable costs: cost which varies with ouput
• fixed: do not vary

Question 5

what is the difference between wages and salaries?

Answer 5

• wages are paid per hour (variable)
• salares are paid anaually (fixed per year)

Question 6

what is the average fixed cost formula?

and graph representation

Answer 6

total Fixed Costs/ Quantity
TFC/Q
* always decreasing becuase fixed cosst are spread across more units

never reachest zero, always falling curve

Question 7

what is the formula for total cost?

and graph representation

Answer 7

Total cost = Total Variable Cost + Total Fixed Cost

TC = TVC + TFC

straight line graph

Question 8

what is marginal cost?

Answer 8

the additional cost of producing one extra unit

Question 9

what is the formula for marginal costs ?

Answer 9

Δ Total costs/ Δquantity

Question 10

what happen to marginal cost as productivity increases?

Answer 10

decrease in marginal costs

inverse relationship

Question 11

what is the law of diminishing marginal returns?

Answer 11

in the short run as more factors of production are employed, productivity will evetually diminish

initially worker can specicialise and productiity increases

Question 12

what is the marginal cost curve in the short run?

and graph shape

Answer 12

• productivity initially increases, marginal costs decrease because of specialsiation
• then as productivity decreases, marginal costs increase because of diminishing marginal returns

nike tick shape

Question 13

draw the AVC and MC curves

Answer 13

intially MC draws AVC down, then pulls it up

AVC intersects MC at it’s lowest point

Question 14

what are the 2 average total cost formulas?

Answer 14

1. ATC= TC/Q
2. ATC= AVC+ AFC

Question 15

Draw the average total cost curve

Answer 15

will intersect MC at it’s lowest point

Question 16

what is the long run average cost curve?

derived from the short run average cost curve

Answer 16

Question 17

what is internal economies of scale?

Answer 17

reduces long average run costs as a firm increases production

Question 18

what are the 6 types of inetrnal economies of scale?

Answer 18

1. Risk Bearing economies of scale
2. Managerial economies of scale
3. Financial economcies of scale
4. Purchasing economies of scale
5. Technical ecnonomies of scale
6. Marketing economies of scale

Richards mum flies past the moon

Question 19

what is purchasing economies?

Answer 19

(bulk buying)
1. as firms expand they can bulk buy raw materials
2. allowing them to negotiate lower prices
3. reducing costs

Question 20

what is technical economies of scale?

Answer 20

big firms invest in specialsit capital, increasing productivity, decreasing their LRAC

can only exploit when firms are big

Question 21

What is managerial economies?

Answer 21

when big firms hire specialist staff, increasing productivity, decreasing LRAC

Question 22

what is marketing economies of scale?

Answer 22

when big firms spread out their marketing costs across the high number of units that they sell, decreasing LRAC

eg: nike coca cola

Question 23

what is finanicial economies of scale?

Answer 23

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

Question 24

what is risk bearing economies of scale?

Answer 24

using profits to diversify in different sectors, reducing the cost of failure in one sector

eg virgin diversifiying in 400 different areas

Question 25

what is internal diseconomies of scale ?

Answer 25

when LRAC inrease as a firm expands

Question 26

what are the three reasons for internal diseconomies of scale?

Answer 26

• allienation
• buracrecy
• communication

abc

Question 27

what is allienation?

Answer 27

workers feel very allientated, a reduction in employees motivation, decreasaing firm’s productivity, increasing LRAC

eg: call centres

Question 28

what is bureaucracy?

Answer 28

spendning on managers, paperworks filling and secretaries that a firm has to pay for when it expands , increasing LRAC

Question 29

what is a minimum efficent scale?

Answer 29

the point on the LRAC curve where a firm first reaches it’s lowest LRAC

Question 30

show internal economies of scale, diseconomies of scale and minimum efficent scale on a LRAC curve

Answer 30

Question 31

what is external economies of scale?

Answer 31

• 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

Question 32

what is the difference between external economies of scaleand internal economies of scale?

Answer 32

• internal: when a firm increases it’s own output, movement along LRAC curve
• external: when an industry increases it’soutput, shift of LRAC curve

Question 33

show external economies of scale on LRAC curve

Answer 33

• cause shift of curve

Question 34

Why does bad communication lead to internal diseconomies of scale?

Answer 34

More challenging to co ordinate effectively amongst departments and teams. This leads to delays and errors which can increase LRACs