lesson 3 - theory of the firms: costs Flashcards
what are fixed costs?
costs you need to pay even if nothing is produced
what is variable costs?
costs that vary with the level of output
how do you figure out total costs?
TC = VC + FC
how do you figure out average costs?
AC = TC / output
why does average variable costs eventually start rising?
there is a constraint on a factor of production so labour becomes less productively inefficient
how do you figure out average total costs?
ATC = AFC + AVC
what is the marginal cost?
the cost for producing one more unit
how do you figure out marginal cost?
change in total costs / change in total output
what is fixed in the short run?
capital
land
what is variable in the short run?
labour
what is the law of diminishing marginal returns?
in the short run when the variable factor is added to the fixed factor, initially marginal and average costs will fall but then will rise when the factors of production become crowded
what is an output concept?
we produce more
what happens when marginal > average?
average rises
what happens when marginal < average?
average falls
what are the three possibilities of the long run returns to scale?
increasing returns to scale
constant returns to scale
decreasing returns to scale
why would we have increasing returns to scale?
falling costs
why would we have constant returns to scale?
steady costs
why would we have decreasing returns to scale?
rising costs
what is technical economies of sale?
larger machinery
specialisation of capital goods
what are examples of internal economies of scale?
technical
financial
marketing
what is financial economies of sale?
cheaper to borrow
easier to sell shares
what is marketing economies of sale?
bulk buying (purchasing power)
advertising costs
packaging and transport costs
when do we have diseconomies of scale?
when there’s a lack of barriers
examples of diseconomies of scale?
lack of control (hard to keep track)
communication
resource prices (high prices driven higher by demand)
co-ordination (firms can be slow to respond to management)
in the long run what is returns to scale?
increasing returns to scale in the long run helps drive economies of scale
what will lead to greater productivity in an industry?
an increase in capital investment
