Costs 3.3.2 Flashcards
Define Production in SR
When at least one factor of production is fixed
Define Production in LR
When all factors of production are variable
Define fixed costs
Costs that dont change with output
Define Variable costs
Costs that vary with output
What are the only costs in the long run and why
Variable costs as all factors of production become variable
Total cost Formula
TVC + TFC
Average Fixed costs Formula
TFC/Q
Define Marginal Costs
Additional cost of selling one extra unit
What is the Marginal Cost Formula
% Change in TC / % Change in Q
Define the Law of diminishing Marginal Returns
In the short run, as more factors are employed, the marginal returns from these factors will decrease
When do diminishing marginal returns occur
In the Short Run only
Why does MC decrease and then increase?
Marginal cost decreases because output increases and more workers are hired, they can specialise, increasing productivity and decrease marginal cost.
But marginal cost will then increase because diminishing marginal returns will decrease productivity, increasing marginal cost.
Average Variable Cost Formula
TVC/Q
What are the different types of internal economies of scale
RMFPTM
Richards Mum Flies Past The Moon
Risk Bearing
Managerial
Financial
Purchasing
Technical
Marketing
What are Purchasing Economies
Bulk Buying allows negotiation for lower costs reduces LRAC
What are Managerial Economies
Hiring Specialist Managers to increase productivity which reduces LRAC
What are Technical Economies
Investing into specialist capital to increase productivity which reduces LRAC
What are Marketing Economies
Spreading marketing costs over several units to reduce LRAC
What are Financial Economies
Bigger firms are less risky and are able to get bigger loans at lower interest rates which reduces LRAC as repayment costs are less
What are Risk Bearing Economies
Large firms are able to diversify reducing the cost of failure
What are Internal Diseconomies of scale
When a firm expands too much and LRAC starts to increase
What causes Internal Diseconomies of scale
ABC
Alienation
Bureaucracy
Communication
What is Alienation and why does it lead to diseconomies of scale
As workers become more alienated productivity falls and LRAC increases
What is Bureaucracy and why does it lead to diseconomies of scale
As a firm expands more managers are needed which increases LRAC
Why do communication issues lead to diseconomies of scale
Slow communication wastes time and causes slow production causing and increase in LRAC
What is the Minimum Efficient Scale
Where a firm first reaches its lowest LRAC
What are External Economies of Scale
Where LRAC falls as an industry’s output Increases
3 Examples of external economies of scale
Infrastructure Improvements
Suppliers/developers move closer to location of firm
