A2 Microeconomics Understanding Short Run Costs

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A2 Microeconomics: Understanding Short Run Costs

A2 Microeconomics: Understanding Short Run Costs

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  • 1. A2 Microeconomics: Understanding Short Run Costs
    Short run costs
    Fixed Costs
    Variable Costs
    AC, MC and AVC
  • 2. 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
  • 3. Give 5 fixed costs for a brewing business such as Heineken
  • 4. Identify some of the variable costs of production here
  • 5. What makes RyanAir a leading low-cost airline?
  • 6. RyanAir Network Route Map
  • 7. Give me
    5
    Factors that make RyanAir one of the world’s most cost-efficient airlines
  • 8. 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
  • 9. 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)
  • 10. Fixed Cost Curves
    Costs
    Total Fixed Cost
    Output
  • 11. Fixed Cost Curves
    Costs
    Total Fixed Cost
    Average Fixed Cost
    Output
  • 12. 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)
  • 13. 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.
  • 14. The Marginal Cost Curve
    Marginal Cost (MC)
    Costs
    Output
  • 15. An increase in marginal costs
    MC2
    Costs
    MC1
    Output
  • 16. Variable Cost Curves
    Costs
    Marginal Cost
    Average Variable Cost
    Output
  • 17. An Increase in Variable Costs
    MC2
    Costs
    AVC2
    MC1
    Average Variable Cost
    Output
  • 18. Family of short run cost curves
    Costs
    MC
    ATC
    AVC
    Output
  • 19. A change (fall) in fixed costs
    Costs
    MC
    ATC1
    ATC2
    AVC
    Output