Economics- Edexcel 3.3.2
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| What incurs economic costs? | business engaging in producing / supplying an output to a market
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| Opportunity cost of running a business | money put in to finance the business and money that could have been earned in another occupation
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| rate of return | the net gain or loss of an investment over a specified time period, expressed as a percentage of the investment's initial cost
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| Short run | at least one of the factor inputs is fixed and the business is operating with fixed and variable factors
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| Long run | all factors of production are variable and the scale of production of goods and services can change allowing the firm to benefit from economies of scale
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| What happens to fixed costs as the level of output changes in the short run? | they do not vary
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| What happens to fixed costs when output is zero? | fixed costs are still incurred
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| Higher level of fixed costs needs what to break even? | higher output
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| Examples of fixed costs | consulting fees, rental costs, marketing budgets, research projects, fixed salary costs, business insurance
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| Examples of variable costs | commission bonuses, wage costs, component parts, basic raw materials, energy and fuel costs, packaging costs
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| Variable costs | costs that relate directly to how much of a good or service is being produced
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| Increase in short run output causes what? | total variable cost to rise
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| Average variable cost formula | total variable cost / output
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| Average variable cost | variable cost per unit
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| What determines variable cost? | marginal cost of extra inputs used in expanding production
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| What 2 facts is the short-run cost curve derived from? | when diminishing returns set in then the marginal product of labour begins to fall and when this falls below existing average product then the average product of labour falls increasing marginal cost of supplying extra output
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| When will AC fall? | when MC < AC
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| Where does average cost intersect the MC? | at it’s minimum
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| When will AC rise? | when MC > AC
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| When will AFC fall? | as the level of output expands
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| Where does AVC intersect MC? | at it’s minimum
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| What determines the shape of AVC? | shape of marginal costs
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| What makes MC rise? | diminishing returns
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| Why do average fixed costs fall continuously as output increases? | because total fixed costs are being spread over a higher level of production
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| What happens to the vertical gap between AC and AVC as short-run output rises? | it gets smaller
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| Change in fixed costs | movement of average total cost but not marginal cost curve
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| Changes in variable costs | movement of marginal and average total cost curve
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| How do businesses look to optimise unit costs? | by keeping capacity utilisation at high levels
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| Spare capacity | when a business is operating below capacity
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| Price discrimination | a selling strategy that charges customers different prices for the same product or service based on what the seller thinks they can get the customer to agree to
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