Costs and EoS

• What are fixed costs?

  Costs that remain constant as output changes
• Give an example of fixed costs.

  • Rent or mortgage repayments
  • Salaries
  • Insurance
  • Loans
  • Taxes on property
• What are variable costs?

  Costs that change as output changes
• Give an example of variable costs.

  • Raw materials
  • Wages
  • Utilities
  • Packaging
• What are total costs?

  The sum of fixed and variable costs
• How do you calculate average cost?

  Total costs divided by output
• What are marginal costs?

  The extra cost of producing one more unit
• What is the short run in terms of production factors?

  The period when at least one factor is fixed
• What is the long run in production terms?

  The time period when all inputs can vary
• What does the law of diminishing returns state?

  As you increase the input of one factor of production while keeping other factors constant, the additional output (or benefit) from each extra unit of input will eventually decrease.
• What are internal economies of scale?

  Cost reductions enjoyed by a single business
• What are the reasons for internal economies of scale?

  1. Financial - negotiate lower interest rates
  2. Marketing - bulk buy advertisement
  3. Technical - specialist machinery boosts productivity
  4. Management - employ managers to boost productivity
  5. Purchasing - buy in bulk and spread costs
• What are external economies of scale?

  Cost reductions available to all businesses
• What are the reasons for external economies of scale?

  1. Concentration of businesses
  2. Improved infrastructure
  3. Enhanced technology and skills
• What are diseconomies of scale?

  When long run average costs rise as output increases
• What are the reasons for diseconomies of scale?

  1. Control issues due to size
  2. Communication problems
  3. Poor coordination and decision-making
  4. Decreased motivation of workforce
• What is minimum efficient scale?

  The lowest output rate for full economies of scale
• What factors affect a business's benefits from economies of scale?

  Demand, nature of production, technological advancement
• What does "returns to scale" refer to?

  Output response to changes in all factor inputs
• What is the divorce of ownership from control?

  Conflict between board and shareholders due to differing objectives
• What are the implications of the divorce of ownership from control?

  • Potential conflicts of interest
  • Different objectives among stakeholders
  • Impact on decision-making and strategy