3.3.4 - Costs Flashcards
Give 3 examples of fixed costs
Rent, Costs of purchasing capital and business insurance
Define Total Fixed Costs
Fixed costs that remain constant as output increases
Define average fixed costs
Total fixed costs divided by output
Why do changes on fixed costs have no effect on marginal costs?
Marginal costs relate only to variable costs.
Define Variable Costs
Costs that directly vary with output.
Give 3 Examples of Variable Cost
Costs of intermediate raw materials, costs of electricity and costs of gas.
Define Average Total Cost
Cost per unit produced
Define Marginal Costs
Change in total costs from increasing output by one extra unit
Describe the link between the law of diminishing returns and marginal cost
The law of diminishing marginal returns implies that the marginal cost of production will rise as output increases
What are Fixed Costs?
Business expenditures that do not vary directly with the level of output
Define economies of scale
Economies of scale are the cost advantages exploited by expanding the scale of production in the long run
How can productive efficiency be measured?
The cost of production
What is a positive sum game?
A scenario where there is increased profits for producers and lower costs for consumers
What are internal economies of scale?
The cost advantages that come from the long term growth of the firm itself
What are External Economies of Scale?
Cost advantages which occur outside of a firm but within an industry
What are some examples of internal economies of scale?
- Technical EoS
- Monopsony Power
- Managerial EoS
- Financial EoS
- Network EoS
Give some examples of technical economies of scale
- Expensive Capital inputs
- Specialisation of the Workforce
- The law of increased dimensions
- Learning by Doing
Explain how expensive capital inputs is a technical economy of scale.
The larger your business is, the more expensive capital you can afford. E.g A large supermarket buying expensive database software that a small corner shop could not afford, which improves productive efficiency
Explain how specialisation of the workforce is a technical economy of scale
The larger your firm, the more easily you can implement the division of labour to reduce costs and improve productive efficiency.
Explain how the law of increased dimensions (The container principle) is a technical economy of scale
(applicable to things like freight and distribution industries) increasing dimensions of something like a oil tanker or passenger aircraft more than proportionally increases capacity, improving productive efficiency as fewer vessels are needed for the same output
Explain how ‘learning by doing’ is a technical economy of scale.
Over time, as companies grow, they get more experience and find more efficient methods of production, reducing costs.
Explain how Monopsony power is an internal economy of scale
The larger the firm, the cheaper the factor inputs because they can afford to buy them in bulk.
Explain Managerial (Internal) Economies of Scale
The bigger when firm the more managers can be employed to watch over production and improve efficiency and reduce costs
Explain Financial (Internal) Economies of Scale
The larger your firm, the higher the tendency for your firm to be rated ‘credit worthy’ and have access to favourable rates of interest for borrowing.
