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Transcript
```Cost Concepts
• Fixed Costs – costs that are independent of
level of output (eg. rent on land, advertising fee,
interest on loan, salaries)
• Variable Costs – costs that are directly linked to
the quantity of output (eg. raw materials,
electricity, shipping, wages)
• Average Costs – cost per unit of production
• Marginal Costs – cost of one additional unit of
output
Three Types of Costs
Cost
Total Cost
Variable Cost
Fixed Cost
Output
Production Costs
Output
Fixed
Cost
0
40
5
Variable
Cost
Total
Cost
---20
10
15
20
Average Marginal
Cost
Cost
7
90
50
Cost Curves
Price £
MC
AC
MC crosses AC at min. AC
Quantity
For the average to be falling, the next unit (marginal) must
be less than the average – so MC must be less than AC
while AC is falling, and greater than AC when AC is rising.
Long Run vs. Short Run AC
• Short Run: time period in which at least one
factor of production is fixed
• Long Run: all factors of production can be varied
Cost £
SRAC1
Economies of Scale:
- decreases in LRAC
from increased scale
of production
LRAC
SRAC2
SRAC3
Quantity
Revenue Curves
D = AR because
it represents all
the prices at
which
consumers are
different
quantities (at 40
units, the price
will be £10, so
this is also the
average
revenue if 40
units are sold)
Price £
AR = D
Quantity
MR
MR drops 2x as
fast as AR,
because as output
is increased and
price is dropped,
all the people who
were previously
paying a higher
price now pay the
lower price, so the
“extra revenue
from one extra
unit” is less than
the actual
for that unit.
Profit Maximisation
A firm will “maximise” profit where: MC = MR
***MEMORISE THIS***
• Because… if adding one extra unit of production
adds more to revenue than to cost, it will increase
total profit and should be produced
revenue than it does to cost, it will reduce profit and
should not be produced
• Firms will produce up until the point where MC=MR
MC = MR
Price £
MC
Quantity
MR
Productivity Concepts - Returns
Output expands when more units of variable factors
(labour, raw materials) are added to fixed factors
(land and equipment)
Returns – a measure of how an increase in inputs
affects the total output - a comparison of percentages
Input 10%
Input 20%
Output 20%
Output 10%
Increasing Returns
Decreasing or
Diminishing Returns
Efficiency Concepts to Assess
Performance of Firms
• Productive Efficiency: firm operates at the
lowest possible average cost (bottom of AC
curve)
• Allocative Efficiency: firm sets price equal to
marginal cost (scarce resources are allocated
where they are most valued by consumers)
• X Inefficiency: bureaucracy & complacency of
firm with too much market power → higher costs
Concentration Ratios
• Used to measure “market concentration” –
what percentage of the market is
dominated by “x” number of firms?
• Eg. “5-firm concentration ratio by sales”
measure the total market share of the
largest five firms in the industry using their
sales numbers
```