Costs of Production + economies of scale Flashcards
What is the short run?
time period in which a minimum of one factor of production is fixed
- occurs in real time
What is the long run?
no factors of production are fixed (firms are able to vary all factor inputs)
In the short run, what does a firm have?
sunk costs
What are sunk costs?
costs that the firm has already paid and are not recoverable if the firm wants to leave the industry
Examples of sunk costs?
- advertising
- research and development
- training
total costs equation?
fixed costs + variable costs
What are fixed costs?
dont vary with output
What are variable costs?
change depending on the level of output
What are average total costs ?
cost per unit produced
ATC equation?
total cost / output
What are variable costs?
varies with output
What are marginal costs?
change in total cost from a business producing just one extra unit of a good or service
Examples of fixed costs in the short run?
- rent
- staff salaries
- marketing
- software
Examples of variable costs in the short run?
- raw materials
- bought in stocks
- wages based on hours workers
- agent and other commisions
What does long run production allow a firm to do?
increase the size / scale of production leading to economies of scale
In the long run all costs are .. ?
variable
What are economies of scale?
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
What are internal economies of scale ?
- expansion of the firm itself
- lower long run average costs
What are external economies of scale?
- expansion of the industry
- benefits most / all firms
Examples of interanal economies of scale?
- technical economies
- financial economies
- purchasing economies
- risk bearing economies
- managerial economies
What is the minimum efficient scale (MES)?
the scale of output where internal economies of scale have been fully exploited
What are agglomeration economies?
businesses in similar industries cluster together and attract and influx of skilled talent which provides human capital to expanding businesses
Examples of external economies of scale?
- university research
- transport networks
- relocation of suppliers
Benefits of economies of scale?
- lower unit costs (more competitive)
What do diseconomies of scale lead to>
a rise in the firms long run average cost of production
What can diseconomies of scale be due to?
- control
- cooperation
- negative effects of interanl politics
Effects of diseconomies of scale?
increases in the unit cost of supply in the long run
- lower competitiveness, fall in market share and profit
