# Costs

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Fixed Cost
Costs that do not vary with output eg cost of factory
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Variable Cost
Costs that do vary with output eg electricity, materials
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Total Cost
Fixed+ Variable Cost
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Marginal Cost
This is the cost of producing one more unit eg MC of producing 4th unit is TC of 4th unit -TC of 3rd unit
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Sunk Costs
Costs that are not recoverable eg advertising
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Accounting Cost
The actual physical cost of a business activity TC=FC+VC
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How to work out Average Total Costs (ATC)
TC/output
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Work out Average fixed cost (AVC)
VC/output
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Work out Average Fixed cost (AFC)
FC/output
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Total Product
total output produced by all workers
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Marginal Product
Output produced by an extra worker
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DIminishing Returns
Occurs in the SR when one factor of production is fixed (eg capital)
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Explain
If the variable factor (eg Labour) is increased, there becomes a point where it is less productive to add an extra worker
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When DIminishing Returns occurs (MP and MC)
Marginal product decreases and Marginal Cost increases
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WHY?
Because capital is fixed so extra workers will eventually get in each others way
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Economies of Scale
occurs when average cost fall with increasing output
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Internal Economies of Scale
Occur when an individual firm becomes more efficient
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Examples of internal economies of scale 1- Technical
Specialisation and division of labour- Workers can do more in specific tasks- greater efficiency eg assembly line
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Examples of internal economies of scale 2- Purchasing
Bulk Buying- Buy in large quantities and average costs will be lower
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Examples of internal economies of scale 3- Technological
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Examples of internal economies of scale 4- Financial
A bigger firm can get better rate of interest than small firms can
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Examples of internal economies of scale 5- Marketing
A national TV ad campaign is efficient for a large firm
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Examples of internal economies of scale 6-Managerial
Business Managers and specialised roles in bigger firms
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Examples of internal economies of scale 7-Networking
Large set up costs but adding additional users is either very low or zero cost
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External economies of scale
Occurs when firms benefit from the whole industry getting bigger eg if industry improves then would benefit from better infrastructure
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Diseconomies of scale
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Why do diseconomies of scale occur?
Poor communication in large firms, Alienation- working in highly specialised assembly line can be boring-workers are less motivated, Lack of control- when large number of worker easier to escape not working hard
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What is Minimum efficiency scale (MES)
Minimum point of output necessary ot achieve the lowest AC on LRAC
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MES calcualtion- IF MES for cars is 10,000 and demand is 40,000- optimum number of firms is?
4
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Total Revenue (TR)
Total income a firm recieves (PricexQuanity=TR)
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Average Revenue (AR)
TR/Output
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Marginal Revenue (MR)
Extra revenue gained from selling an extra unit of a good
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Profit=
Profit= TR-TC OR (AR-AC)xQ
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Opportunity Cost
The loss of the next best alternative when making a choice
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Economic Cost
The entire cost of the businesss action- Accounting+ Opportunity cost= Economic Cost, Includes the thing you have given up on as a cost of production
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AFC is always.....
falling because no diseconomies of scale
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Semi-Variable Cost
Part fixed element and part variable element eg Telephone bills
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## Other cards in this set

### Card 2

Variable Cost

#### Back

Costs that do vary with output eg electricity, materials

Total Cost

Marginal Cost

Sunk Costs