Costs of Production + economies of scale

Question 1

What is the short run?

Answer 1

time period in which a minimum of one factor of production is fixed

• occurs in real time

Question 2

What is the long run?

Answer 2

no factors of production are fixed (firms are able to vary all factor inputs)

Question 3

In the short run, what does a firm have?

Answer 3

sunk costs

Question 4

What are sunk costs?

Answer 4

costs that the firm has already paid and are not recoverable if the firm wants to leave the industry

Question 5

Examples of sunk costs?

Answer 5

• advertising
• research and development
• training

Question 6

total costs equation?

Answer 6

fixed costs + variable costs

Question 7

What are fixed costs?

Answer 7

dont vary with output

Question 8

What are variable costs?

Answer 8

change depending on the level of output

Question 9

What are average total costs ?

Answer 9

cost per unit produced

Question 10

ATC equation?

Answer 10

total cost / output

Question 11

What are variable costs?

Answer 11

varies with output

Question 12

What are marginal costs?

Answer 12

change in total cost from a business producing just one extra unit of a good or service

Question 13

Examples of fixed costs in the short run?

Answer 13

• rent
• staff salaries
• marketing
• software

Question 14

Examples of variable costs in the short run?

Answer 14

• raw materials
• bought in stocks
• wages based on hours workers
• agent and other commisions

Question 15

What does long run production allow a firm to do?

Answer 15

increase the size / scale of production leading to economies of scale

Question 16

In the long run all costs are .. ?

Answer 16

variable

Question 17

What are economies of scale?

Answer 17

the cost advantages from expanding the scale of production in the long run. the effect is to reduce average costs over a range of output

Question 18

What are internal economies of scale ?

Answer 18

• expansion of the firm itself

- lower long run average costs

Question 19

What are external economies of scale?

Answer 19

• expansion of the industry

- benefits most / all firms

Question 20

Examples of interanal economies of scale?

Answer 20

• technical economies
• financial economies
• purchasing economies
• risk bearing economies
• managerial economies

Question 21

What is the minimum efficient scale (MES)?

Answer 21

the scale of output where internal economies of scale have been fully exploited

Question 22

What are agglomeration economies?

Answer 22

businesses in similar industries cluster together and attract and influx of skilled talent which provides human capital to expanding businesses

Question 23

Examples of external economies of scale?

Answer 23

• university research
• transport networks
• relocation of suppliers

Question 24

Benefits of economies of scale?

Answer 24

• lower unit costs (more competitive)

Question 25

What do diseconomies of scale lead to>

Answer 25

a rise in the firms long run average cost of production

Question 26

What can diseconomies of scale be due to?

Answer 26

• control
• cooperation
• negative effects of interanl politics

Question 27

Effects of diseconomies of scale?

Answer 27

increases in the unit cost of supply in the long run

- lower competitiveness, fall in market share and profit