costs and economies of scale

• What are fixed costs?

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

  Costs that change with output
• How is total cost calculated?

  Total costs = total variable costs + total fixed costs
• What is average cost?

  Cost per unit produced
• How is average cost calculated?

  Average costs = total costs / quantity produced
• What is marginal cost?

  Cost of producing one extra unit
• What does the shape of the Short-Run Average Cost (SRAC) curve depend on?

  It varies with industry
• What does the law of diminishing marginal productivity state?

  Adding more variable inputs increases output initially
• What happens after a certain number of inputs are added?

  Marginal increase of output becomes constant
• What can cause a fall in marginal output?

  Labour becoming less efficient and productive
• What happens to total costs when marginal output falls?

  Total costs start to increase
• What do the red parts on the diagram indicate?

  Diminishing returns in production
• How do marginal costs behave with increasing diminishing returns?

  Marginal costs rise
• What do the curves MC, ATC, and AVC represent?

  They rise with diminishing returns
• What happens to average costs before and after the lowest points on the curves?

  Average costs fall before, rise after
• Where does the MC curve intersect the ATC and AVC curves?

  At their lowest points
• What is a characteristic of the short run in production?

  At least one factor cannot change
• What happens in the long run regarding factor inputs?

  All factor inputs can change
• How does the short run vary across industries?

  There is no standard duration
• What is the marginal return of a factor?

  Extra output per extra unit of factor
• What is the average return of a factor?

  Output per unit of input
• What is the total return of a factor?

  Total output produced by multiple units
• When does the law of diminishing returns occur?

  Only in the short run
• What happens to marginal return as more labour is employed?

  Marginal return falls over time
• What is returns to scale?

  Change in output after increasing inputs
• What indicates increasing returns to scale?

  Output increases more than inputs
• What indicates decreasing returns to scale?

  Output increases less than inputs
• What are constant returns to scale?

  Output increases by the same amount as inputs
• What happens to average costs when fixed costs are high?

  Average costs lower as output increases
• What occurs after the optimum level of output?

  Average costs rise due to diseconomies
• What is the minimum efficient scale?

  Point where average costs are lowest
• How does the LRAC curve relate to the SRAC curve?

  LRAC envelopes the SRAC curve
• What happens to SRAC as output increases?

  SRAC falls initially, then rises
• What does it mean if SRAC = LRAC?

  Firm can vary all factor inputs
• What does the L-shaped LRAC curve suggest?

  Costs fall as output increases initially
• What are internal economies of scale?

  Average costs fall as firm grows larger
• What does the mnemonic "Really Fun Mums Try Making Pies" represent?

  Examples of internal economies of scale
• How do risk-bearing economies of scale work?

  Spreads cost of uncertainty across production
• How do financial economies of scale benefit larger firms?

  They can access cheaper loans
• How do managerial economies of scale work?

  Specialization lowers average costs