Costs of Production. Exam Question 2009 Q 3 Explain the shape of the SRAC curve. Explain the relationship between MCC and ACC.

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Presentation transcript:

Costs of Production

Exam Question 2009 Q 3 Explain the shape of the SRAC curve. Explain the relationship between MCC and ACC

Downward sloping from x to y 1. Specialisation As more products are made workers become more experienced and efficient. They can make more products per hour. As a result unit costs are lowered. “Many hands make light work”

2. Fixed Costs spread out over larger output As the number of units produced increases the unit cost falls.

Upward sloping from y to z The Law of Diminishing Marginal Returns As extra units of a variable factor of production (eg. labour) are added to a fixed factor (eg. factory) then eventually the average output will decrease.

This will result in higher unit costs. Eg. 10 workers make 10 product each 100 workers make 9 products each Because the cannot work properly due to overcrowding. “Too many cooks spoil the broth.”

Assumptions governing the LODMR

Mathematical eg of LODMR

Relationship between MC & SR AC When MC > AC then AC is rising When MC < AC then AC is falling When MC = AC then AC is at it’s min

LRAC slopes downward because Economies of Scale Internal Economies of Scale Are those factors within the firm which decreases AC as the size of the firm increases. External Economies of Scale Are those forces outside the firm which decreases AC as the size of the industry increases.

Internal Economies of Scale

External Economies of Scale