3.3 Revenues, Costs and Profits

cost in the short run

at least one factor of production is fixed

cost in the long run

all factors of production are variable

diminishing marginal productivity

• if a variable factor is increased when another factor is fixed, there will come a point where each extra unit of the variable factor will produce less output than the previous unit

economies of scale

when an increase in production causes a lower average cost leading to increase returns to scale

diseconomies of scale

when there is a potential decrease in efficiency and so an increase in output results in a rise in average cost, the firm experiences decreasing returns to scale

what is an internal economy of scale

an advantage that a firm is able to enjoy because of a growth within the firm

• a movement along the LRAS

what are the types of internal economies of scale

• technical EOS- a result of what happens to the production process

• financial EOS- larger firsts can obtain finance easier as there is lower risk

• managerial EOS- larger firsts firsts can appoint specialist managers in every field who are more efficient

• marketing EOS

what is an external economies of scale

advantages which can arise from growth in the industry

• a shift in LRAS

types of external economies of scale

• labour- business established in an area with other successful firms from the same industry will find labour easier (silicone valley)

• support services- business who provide goods for large firms will naturally more to the area those firms are based reducing transport costs

• growth in technology in the market

what can cause diseconomies of scale

• workers may lack incentive- low productivity

• geography- large distances for transport may be hard to control

• management- coordination and control, communication

what are constant returns to scale

where firms increase inputs and receive an increase in output by the same percentage

minimum efficient scale

he minimum level of output needed for a business to fully exploit economies of scale

normal profit

• the return that is sufficient to keep the factors of production committed to business

• AC=AR

supernormal profit

profit greater than normal profit

loss

• when the firm fails to cover its costs

• AR<AC