A2 Microeconomics Understanding Short Run Costs


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A2 Microeconomics: Understanding Short Run Costs

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A2 Microeconomics Understanding Short Run Costs

  1. 1. A2 Microeconomics: Understanding Short Run Costs<br />Short run costs<br />Fixed Costs<br />Variable Costs<br />AC, MC and AVC<br />
  2. 2. Fixed Costs<br />In the short run, because at least one factor of production is fixed, output can be increased only by adding more variable factors<br />Hence we make a distinction between fixed and variable costs<br />
  3. 3. Give 5 fixed costs for a brewing business such as Heineken<br />
  4. 4. Identify some of the variable costs of production here<br />
  5. 5. What makes RyanAir a leading low-cost airline?<br />
  6. 6. RyanAir Network Route Map<br />
  7. 7. Give me<br />5<br />Factors that make RyanAir one of the world’s most cost-efficient airlines<br />
  8. 8. The Low Cost Airline Model<br />RyanAir – now Europe’s biggest airline<br />Carries most passengers (75m in 2011)<br />Coverage = 1,300+ Routes & 45 Bases<br />272 Boeing 737-800‘s + Newest fleet<br />Load factor: 83%<br />Average fare (including bag): €43<br />Revenue per passenger: €54<br />
  9. 9. Fixed Costs<br />Fixed costs<br />Do not vary directly with the level of output i.e. they are treated as independent of production<br />Examples of fixed costs<br />Rental costs of buildings<br />Costs of purchasing capital equipment<br />Pay of full-time contracted salaried staff<br />Interest payments on loans<br />Depreciation of fixed capital (due solely to age)<br />
  10. 10. Fixed Cost Curves<br />Costs<br />Total Fixed Cost<br />Output<br />
  11. 11. Fixed Cost Curves<br />Costs<br />Total Fixed Cost<br />Average Fixed Cost<br />Output<br />
  12. 12. Variable Costs<br />Costs that vary directly with output<br />Examples of variable costs<br />Costs of intermediate raw materials and components<br />Wages of part-time staff or employees paid by the hour<br />Costs of electricity and gas<br />Depreciation of capital due to wear and tear. <br />Total variable cost rises as output increases<br />Average variable cost (AVC) = total variable costs (TVC) /output (Q)<br />
  13. 13. Marginal Cost (MC)<br />Marginal cost is the change in total costs from increasing output by one extra unit. <br />The marginal cost of supplying extra units of output is linked with the marginal productivity of labour. <br />The law of diminishing returns implies that marginal cost will rise as output increases. <br />
  14. 14. The Marginal Cost Curve<br />Marginal Cost (MC)<br />Costs<br />Output<br />
  15. 15. An increase in marginal costs<br />MC2<br />Costs<br />MC1<br />Output<br />
  16. 16. Variable Cost Curves<br />Costs<br />Marginal Cost<br />Average Variable Cost<br />Output<br />
  17. 17. An Increase in Variable Costs<br />MC2<br />Costs<br />AVC2<br />MC1<br />Average Variable Cost<br />Output<br />
  18. 18. Family of short run cost curves<br />Costs<br />MC<br />ATC<br />AVC<br />Output<br />
  19. 19. A change (fall) in fixed costs<br />Costs<br />MC<br />ATC1<br />ATC2<br />AVC<br />Output<br />