P1. Costs of Production
Supplementary Learning Materials - Videos, podcasts, ans schemes etc.
Fixed and Variable Costs |
Short Run vs Long Run |
Variable Factor / Input - This is a factor of production whose quantities can be changed within the time period to change output. Examples of variable factors include labour & raw materials.
Fixed Factor / Input - This is a factor of production whose quantities cannot be changed within the time period to change output. Examples of fixed factors include buildings and heavy-duty machines. |
The short run is a production period during which there is at least one fixed factor. Thus output can only be adjusted by changing the quantities of variable factors.
The long run is a production period which all factors of production are variable. |
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Watch these videos in conjunction with notes p 23.1.3 to 23.1.6. This videos will also help you to understand the concepts better for the BEE qns.
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Why did MC cuts AC at its minimum point? Watch this video, starting from 1:40.
Internal Economies of scale: Different Qmes for different types of firms
Watch the video in conjunction with your notes, pg. 23.1.12 - 23.1.15 |
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You may read accompanying textbook, Economics by John Sloman on the concept "Minimum efficient scale".
The extent of economies of scale can be measured by looking at a firm’s minimum efficient scale (MES).
The MES is the size beyond which no significant additional economies of scale can be achieved.
John Sloman 7th Edition Pg 150
The extent of economies of scale can be measured by looking at a firm’s minimum efficient scale (MES).
The MES is the size beyond which no significant additional economies of scale can be achieved.
John Sloman 7th Edition Pg 150
Understanding the relationship between increasing returns to scale and Internal Economies of scale (LONG RUN CONCEPTS)
FWatch this video in conjunction with notes pg 23.1.8
For long-run production cost analysis, it is important to say that when firms grow in size, it is not merely a layman understanding of expansion but an increase in SCALE OF PRODUCTION. So why does increasing returns to scale results in a firm being able to enjoy internal economies of scale? Watch the video to find out more. |
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Vertical Integration: Backward vs Forward Integration
Vertical integration (Notes pg 23.1.18)
"Forward integration extends organizational reach in the market and helps the organization in tightening its grip on the demand side. On the other side, backward integration stretches the organization’s operations towards the source of raw materials, strengthening its control on the supply side.
Integration strategies of forward and backward integrations help the organization in eliminating the adverse effect of double marginalization. Forward integration enables the organization to respond to changes in demand more effectively, while the backward integration allows the organization to seize a stronger control over its quality of raw material supply and, thereby, its quality of final products." You can find out more here.
"Forward integration extends organizational reach in the market and helps the organization in tightening its grip on the demand side. On the other side, backward integration stretches the organization’s operations towards the source of raw materials, strengthening its control on the supply side.
Integration strategies of forward and backward integrations help the organization in eliminating the adverse effect of double marginalization. Forward integration enables the organization to respond to changes in demand more effectively, while the backward integration allows the organization to seize a stronger control over its quality of raw material supply and, thereby, its quality of final products." You can find out more here.
Answers to tutorial questions
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Essay Question 1a) - N2004 Q3 - Using the appropriate examples,explain the difference between interal and external economies of scale. (10)
Essay 1a video 5mins (important points to note) Essay Question 2: 2003 A-Levels Q2 In 2001 there was a world-wide reduction in airline business. Smaller airlines with lower costs and cheaper discount fares suffered less than the high-cost larger airlines such as Air France, Swissair and Lufthansa. (a) Explain why, according to economic analysis, there are benefits from large scale organisations. [12] (THINK: What are the differences in the question requirement (and hence structure of essay) between Q1a and 2a?) Pardon me for the poor quality video - I recorded this in classroom without an external mic (ms wang) |
FAQs on concepts2. Derivation of LRAC from SRAC (Recall: LRAC is a planning curve)
3. Why is MR twice as steep as AR? (Mathematical Derivation)
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Have you achieved the following Learning Objectives?
Concepts and Tools of analysis
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Learning ObjectivesAn understanding of the concepts of average total cost (ATC), average variable cost (AVC) and marginal cost (MC) is sufficient.
An understanding of the significance of variable costs in the short-run pricing and output decisions of firms is required. In addition, an understanding of how fixed costs might affect firms’ decisions in the long run, such as whether to increase the scale of production, is required. For example, firms with significantly high fixed costs (such as those in the telecommunications industry) may choose to increase the scale of production in order to reap economies of scale and lower the long-run average cost of production. Additional Note: The focus is on the use of the cost curves as analytical tools in analysing firms’ behaviour under different market structures. For example, the downward sloping MC curve could be used as a tool to explain the existence of natural monopoly. An understanding of the different types of internal and external economies and diseconomies of scale and their applications of real-world examples is expected. o Types of internal economies of scale include technical, financial, managerial, marketing and risk-bearing economies. o Types of internal diseconomies of scale include high cost of monitoring and management, X-inefficiency, and low morale of employees. o Types of external economies of scale include the availability of shared resources (such as research and development facilities and knowledge), infrastructure and industry-specific skilled labour. o Types of external diseconomies of scale include the strain on physical infrastructure and shortage of industry-specific resources. The following should be included: o the significance of internal and external economies; and diseconomies of scale for long run planning, with applications to real examples. |