Unit 4: Chapter 19 Flashcards
Costs, scale of production and break-even analysis
What are fixed costs?
a cost that is the same and not affected by output
they must be paid no matter the sales of the month (rent, salaries etc)
What are variable costs?
costs that change depending on the output/demand
raw materials
What are startup costs?
costs you must pay at the start (investments)
What is the formula for total costs?
fixed cost + (total variable costs x quantity)
What is the formula for average cost?
total cost of production / output
What are economies of scale?
the factors that lead to a reduction in the average costs as a business increases in size
What are the 5 economies of scale?
purchasing economies, marketing economies, financial economies, managerial economies, technical economies
What are purchasing economies?
as a business grows they have enough cash flow to buy in bulk, giving them discounts which reduce the unit cost of a product
What are marketing economies?
as a business grows they can invest in more advertisement that increases brand awareness overall increasing sales
What are financial economies?
because large businesses raise capital cheaper banks are more likely to give loans + lower interest because they are more safe to pay the money back
What are managerial economies?
bigger companies can afford to pay for specialists and higher skilled workers which increases efficiency
What are technical economies?
flow production methods can be implemented as larger companies can afford the startup costs, which can increase efficiency
What are diseconomies of scale?
the factors that lead to the increase in average costs as a business grows beyond curtain size
What are the 3 diseconomies of scale?
poor communication, lack of commitment from employees, weak coordination
What is the break even level of output?
the quantity that must be produced/sold for total revenue to equal total costs. so that the business doesn’t make a loss.
