Production Costs and Economies of Scale

A set of flashcards covering key definitions and concepts related to production costs and economies of scale in economics.

Costs

Expenses that must be met when setting up and running a business.

Fixed Costs

Costs that do not vary with the level of output.

Variable Costs

Costs that change when output levels change.

Total Cost

Fixed costs and variable costs added together.

Economies of Scale

Falling average costs due to expansion.

Diseconomies of Scale

Rising average costs when a firm becomes too big.

Average Cost

The cost of producing a single unit of output.

Profit Maximization

The level of output where the firm receives maximum profit.

Total Revenue

Total amount of money a firm receives from selling its output.

Managerial Economies

Saves business money through employing specialized staff.

Purchasing Economies of Scale

Cost advantages gained from bulk purchasing.

Risk-bearing Economies

Large firms can spread risks across multiple products.

Financial Economies

Better lending terms and lower interest rates for large firms.

Average Unit Costs

Calculated as total costs divided by output.

Unit Cost

The cost of producing one unit of a good.

External Economies of Scale

Advantages gained for the entire industry rather than individual businesses.

Internal Economies of Scale

Cost advantages that benefit an individual firm as it grows.

Why might a firm choose to remain small?

Firms might choose to remain small to maintain flexibility, personalize customer service, avoid diseconomies of scale, or to focus on niche markets.