O'keefe Revision Guide- Costs Flashcards
What are variable costs?
Costs that vary with output
What are fixed costs?
Costs that do not vary with output
What are total costs?
Fixed costs + variable costs
What are marginal costs?
The cost of producing one extra unit of output
What are sunk costs?
Costs that are not recoverable, for example advertising
How do you work out average total/variable/fixed cost?
TC/VC/FC divided by quantity
In what situation does marginal returns occur?
In the short run, where capital is fixed
What is marginal product?
The output produced by one extra worker
Explain 7 reasons as to why economies of scale occur
Specialisation and division of labour- in large scale operations, workers can do more specific tasks and become skilled in them, increasing overall efficiency
Bulk buying - average costs are lower for larger orders
Technical - when a firm benefits from increased scale of production, eg maximising the use of a large machine
Financial economies - a bigger firm will find it easier to get a loan, and get a better rate of interest than a smaller firm
Marketing- a national tv advertising campaign is more efficient for a large firm with national sales
Risk bearing - a larger firm has bigger resources to absorb an unexpected shock
External economies of scale - when firms benefit from the industry getting bigger, eg specialised labour and strong supply networks
What are diseconomies of scale?
When the long run average costs begin to rise as output increases
Give 3 reasons as to why diseconomies of scale may occur
Poor communication in a large firm with many workers
Alienation, as working in a highly specialised assembly line can become very boring and hence workers become de-motivated
Lack of control - when there are large numbers of workers, it’s easier for them to not work hard and go unnoticed
What is the minimum efficient scale?
The minimum point of output necessary to achieve the lowest AC on the LRAC
