Costs

Question 1

What is short run

Answer 1

When at least one FOP is fixed

Question 2

What is the long run

Answer 2

When all FoP are variable

Question 3

What are variable costs

Answer 3

Costs which vary with output.
Eg a chefs variable costs could be the ingredients they use, more meals mean more ingredients

Question 4

What are fixed costs

Answer 4

Costs which don’t vary with output
Eg restaurant kitchen equipment, you wouldn’t buy more equipment if there is an increase in the amount of meals demanded

Question 5

Total cost equation

Answer 5

TC = total variable cost + total fixed cost

Question 6

What is marginal cost

Answer 6

The additional cost of selling one extra unit

Question 7

Marginal cost formula

Answer 7

MC = change in TC/ change in Q

Question 8

What is the law of diminishing marginal returns

Answer 8

When Productivity will eventually diminish

Question 9

Does diminishing marginal returns occur in the long or short run

Answer 9

Short run only

Question 10

Average variable cost formula

Answer 10

AVC= TVC/Q

Question 11

AC = …

Answer 11

TC/Q

Question 12

Average total cost formula

Answer 12

ATC = AVC+ MC
= TC/ Q
= AVC +AFC

Question 13

What are the internal economies of scale?

Answer 13

Risk bearing
Managerial
Financial
Purchasing
Technical
Marketing

Question 14

As companies get bigger they can exploit internal economies to…

Answer 14

Reduce their LRAC

Question 15

What is internal diseconomies of scale

Answer 15

When a firm expands too much and its LRAC starts to rise

Question 16

What are the 3 main reasons why a firm might experience internal diseconomies of scale

Answer 16

Alienation- when workers feel disconnected at work
Bureaucracy- all the paperwork and forms that a firm has to pay for when it gets really big
Communication- takes long to communicate between staff and more expensive as a firm gets big

All increasing LRAC

Question 17

What is internal economies of scale

Answer 17

When LRAC falls as a firm expands

Question 18

What is minimum efficient scale

Answer 18

The quantity Where a firm first reaches its lowest LRAC

Question 19

What is external economies of scale

Answer 19

Reductions in LRAC, as industry output increases

Question 20

Average return equation

Answer 20

Average return= total output / total input

Question 21

What is total return

Answer 21

The total output produced by all of the inputs
Input eg would be chef and output would be pizza

Question 22

What is returns to scale

Answer 22

Measures how a firms output changes in response to a change in a firms inputs

Question 23

Purchasing economies of scale

Answer 23

As firms expand, they are able to purchase raw materials such as oil and food in bulk which reduce their LRAC as they can negotiate lower prices with suppliers, increasing output

Question 24

Technical economies of scale

Answer 24

Large firms invest in specialist machinery such as Amazon’s warehouse robots who track and package customer items into box which allows them to deliver 426 items per second. This allows LRAC to decrease because wage costs decrease and output increases

Question 25

Managerial economies of scale

Answer 25

Large firms are able to employ specialist managers who specialise in different tasks such finance managers. This decrease LRAC productivity and output increases.
Whereas for small firms it would be extremely expensive to employ specialist staff as they would only be producing a few units

Question 26

Marketing economies of scale

Answer 26

Celebrity endorsements such as KSI and Logan Paul advertising their new drink called prime allowing output to increase sales due to a large and loyal fanbase.

Firms promoting goods during peak seasons such as Christmas and Easter to increase demand and output.

Question 27

Financial economies of scale

Answer 27

CEO of Alibaba, took out a risky loan of 25% as the bank wanted to offset the high risk of lending to the CEO with little experience. As Alibaba grew into an MNC, this led to the bank willing to lend at a lower IR as it was less risky for the bank.
In 2016, the bak issued a loan of $3bn at 2% IR

Question 28

Risk-bearing economies of scale

Answer 28

Richard Branson used supernormal profits made by Virgin records to diversify into new markets allowing cost of failure to decrease. Richard diversified into more than 400 sectors E.G
Virgin cola entered the market and spent $1bn on advertisements but due the Coca Cola strong brand loyalty consumers did not switch to the substitute leading to Virgin cola leaving the market

Question 29

Examples of External economies of scale

Answer 29

Alaska airlines used ai to optimise flight paths which saved 500000000 gallons of fuel and saved nearly $1bn in costs

Green screen allowing transportation costs to decrease for the entire film industry