Costs & revenue. Economies & Diseconomies Flashcards
What is fixed costs
Costs incurred by the firm that do not vary with the level of output
Examples if fixed costs
Rent Electricity Salary
Variable costs
Costs incurred by the firm that do not vary with the level of output
Examples variable costs
Wage Factors of production Raw materials
Average total cost
The cost per unit of output Total cost/output
Average fixed cost
Fixed costs per unit of output produced
Average vaiable cost
Variable costs pet unit of output produced
Marginal cost
The addition to total cost that results when on extra unit of output is produced Change in total cost/change in output
Better workers
Increases in capital investment Better working conditions Improved education/training Higher wages More capital per worker
Short run
The short-run in microeconomics can be defined as a time period in which at least one of the four factors of production is fixed.
Long run
The long run in micro-economics can be defined as a time period in which the scale of all four factors of production can change.
What is total costs?
Total costs of production is the sum of all the costs of producing a particular level of output. Total costs will always rise as a firm increase it’s output because increasing output requires more inputs, such as raw materials, labour and capital
Definition of economies of scale
Where an increase in the scale of production leads to a reduction in long run average costs.
Internal economies of scale
Economies of scale that arise from the expansion of the firm.
External economies of scale
Economies of scale that arise from the expansion of the industry in which the firm is operating.
Definition of diseconomies of scale
Where an increase in the scale of production leads to an increase in long run average costs.
Internal diseconomies of scale
Diseconomies of scale that arise from an expansion of the industry in which is the firm is operating
EOS GRAPH
The cost of every unit produced decreases due to growth in the industry
DOS
The cost of every unit produced increases due to growth in the industry.
Causes IEOS PURCHASING ECONOMIES
Bulk buying. Large firm with a high level of output can afford to buy it’s inputs. E.g. Fuel. Negotiate a discounted price. Reduces LT average costs.
IEOS MANAGERIAL ECONOMIES
Mangers saltines are a fixed cost for businesses about out rises this fixed cost is spread over more units and average fixed costs fall. LT - beneficial
IEOS TECHNICAL ECONOMIES
Economies of increased dimensions. Larger higher level output. Large vehicles. Reduced average fixed costs LT - beneficial
IEOS OTHER TECH.
Advanced machinery. Mass production techniques. Raises productivity. Reduces LR costs.
RISK BEARING ECONOMIES
Safer from Risk of failure Greater scope to make cutbacks.
IDOS POOR COMMUNICATION
Fall in productivity Rise in LRAC
Motivational DOS
Workers feel isolated Motivation/productivity decrease LRAC JNCREASE
EEOS CONCENTRATION
Cooperate on research etc reducing long run costs. More availability.
EEOS Economies of information
Industry blogs produced disseminate info. Reduce long run average costs.
EDOS - congestion
Transport infrastructures become ingested leading to an increase in LR costs.
EDOS RESOURCE COSTS
More expensive for resources. E.g. Cost of land rises
Evaluation benefits of economies of scale
Lower unit costs
Business profits
More international, more employment, higher standard of living
Evaluation drawbacks economies of scale
Demand lacking
Standardisation
businesses may dominate a market.
Technical efficiency
Attaining the maximum possible output from a given set of inputs.
Cost efficiency
The appropriate combination of inputs of factors of production given the relative prices of these factors.
Total costs of production
Sum of all costs of producing at a particular output.
Marginal Cost
the addition to total cost that results when on extra unit of output is produced.
Marginal Cost equation
MC = Δ in total cost ——————— Δ in output
type of graph
diseconomies of scale
type of graph
internal
Internal economies of scale causes
purchasing economies: bulk buying
Managerial economies: specialisation
Financial economies: borrow at lower rates
Technical economies: production process
Risk bearing economies: more diversified products less chance of failure.
