Business Costs Welcome Back! A2 Economics - Unit 3 - Mrs G

Your timeline You have 5 weeks until summer hols Business Costs Your timeline You have 5 weeks until summer hols This means we can cover a significant section of A2 theory…. You are expected NOT to make a final decision on which A level not to continue until after your August results…. (Thurs 20th Aug) It is possible to wait until 1st week back before a final decision HAS to be made. Basically they have to attend ALL lessons this ½ term & we will log absences etc on MY ASHCOMBE system. A2 Economics - Unit 3 - Mrs G

Will be part of your A2 exams in January! The next 8 lessons Does cover A2 theory Will be assessed in Oct Will be part of your A2 exams in January!

This summer’s exam paper

Student self evaluation It is really useful to have an insight into your opinion of the June exam Please complete this form in as truthfully as possible…. It’s helpful to know whether you ran out of time, didn’t complete Q’s, had loads of time, used extra paper It’s also interesting to analyse what resources you used and methods of revision!

Unit 3 - Business Economics 2009-2010 Business Costs Unit 3 - Business Economics 2009-2010 A2 Economics - Unit 3 - Mrs G

Not sure whether to cont with Economics? This summer’s work… If you study BS – this summer’s work will help you with BS work for next year (not the same but an awareness will help) We will be looking at NEW theory in term 1 for a Jan exam – business economics We will finish this theory by Dec – and will have time to start unit 4 (Macro) which will help anyone who wants to improve AS marks!

And lots of NEW diagrams! Business Costs What is Unit 3 all about? The Objectives of Firms The Divorce of Ownership from Control The Law of Diminishing Returns and Returns to Scale Fixed and Variable Costs, Marginal, Average and Total Costs, Short-run and Long-run Costs Economies and Diseconomies of Scale Technological Change, Costs and Supply in the Long-run Total, Average and Marginal Revenue Profit And lots of NEW diagrams! A2 Economics - Unit 3 - Mrs G

By Oct ½ term you’ll understand this!

And this (profit making business!)

And this … a loss making business..

Lets start with some basic business issues 1st. PS…. All business students’ won’t know all of this – so stay focused guys!

What is a Firm? A business? A corporation? Business Costs What is a Firm? A business? A corporation? A firm is a business enterprise that produces or deals in & exchanges goods or services. Firms operate in both the PRIVATE and PUBLIC sector of the economy. Privatisation = selling industries from public to private (BA, BT, British Gas) Nationalisation = govt buying a private business for the public sector. (Northern Rock) Public Sector Include nationalised industries eg Royal Mail and municipal owned businesses eg Local authority busses Ideal if you could run DVD from Corporation – to show the range of businesses that they are aware of… Private sector Unincorporated – sole trader & partnerships Incorporated – Ltd & Plc Others = co-ops & friendly societies! A2 Economics - Unit 3 - Mrs G

Business Costs

Aims of today’s lessons For you to know the different costs of running a business. To be familiar with the 3 key cost terms To be able to interpret a cost diagram To try not to confuse BS students with their AS understanding of Business costs!

What are the costs for each type of business? Market trader Amazon Channel Tunnel Restaurant Thorpe park Farmer Royal Mail Google On your handout – write down as many ‘costs’ involved that the entrepreneur / owners will have to pay to keep the business running

Costs of the Channel Tunnel

Costs of a local market trader

Costs of Amazon.com

Costs of a restaurateur

Costs of a theme park eg Thorpe Park

The costs for a ‘typical farmer’!

Costs for Royal Mail

Costs for Google

Two key types of costs – FIXED and VARIABLE Theory… Two key types of costs – FIXED and VARIABLE

Business Costs 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 Fixed costs are also known as the overhead costs of a business A2 Economics - Unit 3 - Mrs G

Fixed Costs Fixed costs Business Costs Fixed Costs Fixed costs These do not vary directly with the level of output i.e. they are treated as independent of production Examples of fixed costs include the rental costs of buildings, equipment such as plant and machinery, the costs of full-time contracted salaried staff, the costs of meeting interest payments on loans, the depreciation of fixed capital (due solely to age) and also the costs of business insurance Fixed costs are also known as the overhead costs of a business A2 Economics - Unit 3 - Mrs G

Business Costs Variable Costs Variable costs are business costs that vary directly with output. Examples of variable costs include the costs of intermediate raw materials and other components, the wages of part-time staff or employees paid by the hour, the costs of electricity and gas and the depreciation of capital inputs due to wear and tear. A2 Economics - Unit 3 - Mrs G

Factor inputs – a case of Amazon… Business Costs Factor inputs – a case of Amazon… Look closely at the next 8 slides – I’ll run through them twice! At the end you will be asked to identify items that will be FIXED and VARIABLE within the business! A2 Economics - Unit 3 - Mrs G

So what did you see? Can you identify any FIXED cost items? Can you identify any VARIABLE cost items?

Fixed Costs Fixed costs Business Costs Fixed Costs Fixed costs These do not vary directly with the level of output i.e. they are treated as independent of production Examples of fixed costs include the rental costs of buildings, equipment such as plant and machinery, the costs of full-time contracted salaried staff, the costs of meeting interest payments on loans, the depreciation of fixed capital (due solely to age) and also the costs of business insurance Fixed costs are also known as the overhead costs of a business A2 Economics - Unit 3 - Mrs G

Fixed Cost Curves Costs Total Fixed Cost Output Business Costs Fixed costs (FC) are totally independent of output and must be paid out even if the production stops. Capital intensive industries with a high ratio of fixed to variable costs offer scope for economies of scale AFC = Fixed Costs (FC) / Output (Q). Output A2 Economics - Unit 3 - Mrs G

Fixed Cost Curves Why does the AFC curve? Costs Total Fixed Cost Business Costs Fixed Cost Curves Why does the AFC curve? Costs Total Fixed Cost Average fixed costs must fall continuously as output increases because fixed costs are being spread over a higher level of production. In industries where the ratio of fixed to variable costs is extremely high, there is great scope for a business to exploit lower fixed costs per unit if it can produce at a big enough size Average Fixed Cost Output A2 Economics - Unit 3 - Mrs G

Business Costs Variable Costs Variable costs are business costs that vary directly with output Examples of variable costs include the costs of intermediate raw materials and other components, the wages of part-time staff or employees paid by the hour, the costs of electricity and gas and the depreciation of capital inputs due to wear and tear. A2 Economics - Unit 3 - Mrs G

Try this as a quick exercise On your whiteboard write FIXED on one side and VARIABLE on the other! Fixed costs (FC) (no matter how much or little a company supplies – these costs have to be paid) Variable costs (VC) (increase in line with output, if you produce nothing these costs will be zero)

Are each of these Fixed or Variable? equipment depreciation insurance loan repayments maintenance marketing raw materials rent salaries utility bills (heating lighting water) wages

The answers So why do utility bills appear on both sides?! Fixed costs equipment depreciation insurance loan repayments maintenance marketing rent salaries utility bills (heating lighting water) Variable costs raw materials rent Wages utility bills (heating lighting water) So why do utility bills appear on both sides?! Known as semi variable costs!

Super Size shopping?!!! Supersize me salads… Business Costs Super Size shopping?!!! Supersize me salads… Why would a company bother to do this? What economic reasons can there be for this? Supersize me shopping centre! http://news.bbc.co.uk/1/hi/uk/7452454.stm http://news.bbc.co.uk/1/hi/business/7700225.stm A2 Economics - Unit 3 - Mrs G

Homework… Make it as colourful & visual as possible! Select a business of your own choice Create a poster to show/explain all the FIXED & VARIABLE costs of running that business. Ideas could include Glastonbury Shell Tesco Florist Oasis Tour… Make it as colourful & visual as possible!

Plenary Using post-it notes – write down 3 key points from today’s lesson come up and stick them on the board What are the similarities? Where are there any differences?

Next lesson Average and marginal costs – SR & LR costs Please bring a calculator with you! Then we will look at business revenues