Chapter 11 - Costs, EoS, revenue and profit

• What are the key decisions firms need to make?

  Production and price decisions
• Why are revenues and costs important for firms?

  They influence production and pricing decisions
• What are the learning objectives of this chapter?

  • Explain short and long run factors
  • Explain accounting, normal, supernormal profits
  • Explain law of diminishing returns with a diagram
  • Explain internal and external economies of scale with a diagram
  • Explain diseconomies of scale with a diagram
  • Explain minimum efficient scale with a diagram
  • Evaluate causes of economies and diseconomies of scale
  • Evaluate significance of economies and diseconomies of scale
  • Explain and calculate various costs
  • Explain and calculate revenue
  • Explain and calculate profit and loss
• What is a firm?

  An organization that produces output
• What is the role of firms in the economy?

  To organize production and supply output
• How do firms vary in size and organization?

  From small businesses to multinational corporations
• What influences a firm's decision on the scale of operations?

  The market nature and technology of the sector
• What are the two types of time periods firms consider?

  Short run and long run
• What is the short run in economic terms?

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

  The period where all factors can vary
• What does the law of diminishing returns state?

  Output decreases with increased variable input
• What is marginal physical product of labour (MPP)?

  Additional output from one more unit of labour
• Why is the law of diminishing returns a short-run concept?

  It assumes capital is fixed during the period
• What are total, marginal, and average costs?

  • Total cost: Sum of all production costs
  • Average cost: Total cost divided by output
  • Marginal cost: Change in total cost for one more unit
• What are fixed costs?

  Costs that do not vary with output level
• What are variable costs?

  Costs that vary with the level of output
• What are sunk costs?

  Costs that cannot be recovered if exiting
• How can a fast-food outlet expand production in the short run?

  By hiring more staff and buying more inputs
• What are the key concepts related to costs and production in firms?

  • Short run vs. long run
  • Law of diminishing returns
  • Total, average, and marginal costs
  • Fixed and variable costs
  • Sunk costs
• What is marginal cost?

  The cost of producing an additional unit
• How is total cost calculated?

  Total cost = fixed costs + variable costs
• What are variable costs?

  Costs that vary with output level
• What are sunk costs?

  Costs that cannot be recovered if trading ceases
• How can a fast-food outlet expand production in the short run?

  By hiring more staff and buying more ingredients
• Why do total costs increase as production volume increases?

  More variable inputs are needed for higher output
• What shape is the short-run average cost (SATC) curve commonly assumed to be?

  U-shaped
• What happens to short-run marginal costs (SMC) as diminishing returns set in?

  Marginal costs rise
• What do fixed costs include?

  Rental on factory or office space
• What is the long-run average cost curve (LAC) derived from?

  Short-run average cost curves (SATC)
• What is the relationship between short-run and long-run average costs?

  Long-run costs are lower than short-run costs
• What are economies of scale?

  Lower long-run average costs from increased production
• How does the division of labour relate to economies of scale?

  It increases productivity in larger firms
• Why might some industries exhibit more significant economies of scale than others?

  Due to industry-specific cost benefits
• What is a source of technical economies of scale?

  Large-scale production is more efficient
• How do overhead expenditures relate to economies of scale?

  They do not vary directly with production scale
• How does marketing relate to economies of scale?

  Average marketing costs decrease with larger sales
• How does management efficiency relate to economies of scale?

  Large firms can manage more efficiently
• What happens to management needs as a firm expands?

  Management does not need to grow proportionately
• What is the impact of employing specialist staff in larger firms?

  It can lead to economies of scale
• What is unit cost?

  The cost per unit of output produced