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A2 Microeconomics: Understanding Short Run Costs Short run costs Fixed Costs Variable Costs AC, MC and AVC
Fixed Costs In the short run, because at least one factor of production is fixed, output can be increased only by adding more variable factors Hence we make a distinction between fixed and variable costs
Give 5 fixed costs for a brewing business such as Heineken
Identify some of the variable costs of production here
Give me 5 Factors that make RyanAir one of the world’s most cost-efficient airlines
The Low Cost Airline Model RyanAir – now Europe’s biggest airline Carries most passengers (75m in 2011) Coverage = 1,300+ Routes & 45 Bases 272 Boeing 737-800‘s + Newest fleet Load factor: 83% Average fare (including bag): €43 Revenue per passenger: €54
Fixed Costs Fixed costs Do not vary directly with the level of output i.e. they are treated as independent of production Examples of fixed costs Rental costs of buildings Costs of purchasing capital equipment Pay of full-time contracted salaried staff Interest payments on loans Depreciation of fixed capital (due solely to age)
Fixed Cost Curves Costs Total Fixed Cost Output
Fixed Cost Curves Costs Total Fixed Cost Average Fixed Cost Output
Variable Costs Costs that vary directly with output Examples of variable costs Costs of intermediate raw materials and components Wages of part-time staff or employees paid by the hour Costs of electricity and gas Depreciation of capital due to wear and tear. Total variable cost rises as output increases Average variable cost (AVC) = total variable costs (TVC) /output (Q)
Marginal Cost (MC) Marginal cost is the change in total costs from increasing output by one extra unit. The marginal cost of supplying extra units of output is linked with the marginal productivity of labour. The law of diminishing returns implies that marginal cost will rise as output increases.
The Marginal Cost Curve Marginal Cost (MC) Costs Output
An increase in marginal costs MC2 Costs MC1 Output