Unit Costs

Question 1

What are unit costs?

Answer 1

Knows as average costs, shows the cost to the business of producing one unit.

Total Costs/Unit Output

Question 2

What amount of unit cost is good/bad?

Answer 2

• lower the unit cost the better

- indicates that a business is being more efficient, making one unit for a lower cost than before

Question 3

How can unit costs be used?

Answer 3

Can compare:

• different businesses
• the same businesses
• different levels of output

Question 4

Why are unit costs important?

Answer 4

• falling level of unit costs indicates improving efficiency
• rising level indicates inefficiency
• with low unit costs a business will:
  1. Charge the same price and make more profit
  2. Lower the price, increase demand and sell more with the same profit margin

Question 5

How can a business improve efficiency?

Answer 5

• on the job training that can improve employee skills to work more efficiently
• improved motivation, more motivated employees produce greater output for the same effort than de-motivated ones
• more/better capital
• better raw materials (reduces waste)
• improved organisation of production