Module 6

• exists when the total cost of production variable costs

  Marginal costs
• do not contribute to a change in total costs

  Fixed Costs
• defined as the overall change in price when a buyer increases the amount purchased by one unit

  Marginal Costs
• Can help firms determine the level at which it achieves economies of scale

  Marginal Cost
• Formula for Marginal Cost

  change in total cost / change in quantity
• Formula for Break-even Quantity

  fixed cost / contribution margin
• Formula for contribution margin

  Price - Marginal Cost
• Your investment is profitable when

  you expect to sell more than the break-even quantity
• When you neither loses or gain profit

  break-even quantity
• What is left after Marginal Cost to "contribute" to covering fixed costs

  Contribution Margin
• Larger Marginal Cost = Greater Break-even Quantity
• The smaller the break-even quantity, the better
• Break-even Quantity is when Total Revenue = Total Cost
• Total Revenue is equal to Price times Quantity; OR Total Fixed Cost + ( Average Cost times Quantity)
• PQ - (AVC X Q) = ?

  TFC
• Total Cost is equal to Total Fixed Cost + Total Variable Costs
• often decreases as Quantity increases due to the presence of Fixed Costs

  Average Costs
• Fixed Cost does not change as Quantity increases
• Also known as the principle of diminishing marginal productivity (short-run production)


  Law of Diminishing Marginal Returns
• input leads to productive returns; pays to invest more time and effort


  Most Productive
• Where each added input leads to a decreasing rate of output; best to stop somewhere within phase

  Diminishing Returns
• Avoid this phase; not get a return for effort + decrease overall output

  Negative Returns
• The effect of increasing input in the short run after an optimal capacity has been reached while at least one production variable

  Diminishing Marginal Returns
• When diminishing marginal returns, an increase in input is


  a decrease in output
• measures change in productivity; long-run


  Returns to Scale
• Average costs are constant with respect to output

  Constant returns to scale
• Average costs fall with output; also known as economies of scale


  Increasing returns to scale
• Average cost rise with output; also known as diseconomies of scale


  Decreasing returns to scale
• In Economies of Scale, when output increases, it is cost-saving, wherein the average total cost


  decreases
• In economies of scale; at low level outputs, a firm can usually increase its output at a rate that exceeds the rate at which it increases its factor inputs
• Caused by factors within a single company

  Internal Economies
• Affect the entire industry

  External Economies
• Economies of Scale occur as a company's production increases and results in fixed costs becoming a lower percentage of each unit.
• Occurs when a company becomes too big; lowering its production

  Diseconomies of Scale
• The learning curve refers to how the curve production lowers future costs
• a concept that graphically depicts the relationship between the cost and output over a defined period of time

  Learning Curve
• The learning curve was first described by the psychologist in 1885 (name?)


  Hermann Ebbinghaus
• The steeper the slope of the learning curve


  The higher the cost savings per unit of output
• describes situations where producing two or more goods together results in a lower marginal cost than producing

  Economies of Scope
• Th economies of scope exist if the cost of producing two outputs jointly is less than the cost of producing them separately; which follows the rule


  Cost (Q1,Q2) < Cost(Q1) + Cost (Q2)