Business Costs

Question 1

Why must businesses think about costs?

Answer 1

• to determine prices of products
  -for decision making
  -costs of operations can be compared w revenue to determine if profits or losses have been made

Question 2

Types of costs

Answer 2

• fixed costs- do not vary w output or a tivities of the business, they HAVE to be paid e.g wages
• variable costs- these costs vary directly w the number of items sold/ produced e.g electricity

Question 3

What are total costs?

Answer 3

Combination of fixed costs and variable costs during a period of time
Calculated by adding both

Question 4

Define average costs

Answer 4

This is the total cost of production divided by the total output

Question 5

Uses of cost data

Answer 5

1. Setting prices for goods and services
2. Deciding if production should continue or stop
3. Deciding on the best location comparisons

Question 6

Define economies of scale

Answer 6

These are the factors that lead to the reduction of average costs as a business grows

Question 7

What are the types of economies of scale?

Answer 7

• purchasing economies- companies get discounts if they buy in bulk
  -marketing economies- lower advertising costs for big companies as their already known, therefore, marketing agencies offer good rates for adverts.
  -managerial economies-this leads to efficiency when large organizations employ or can afford specialist managers, therefore quality decision making occurs
  -technical economies- since large firms use flow production using specialized machines and this reduces average costs. Technology is expensive and only large businesses can afford the level of capital investments required.