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

2. 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

3. 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!

4. This summer’s exam paper

5. 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!

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

7. 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!

8. 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

9. By Oct ½ term you’ll understand this!

10. And this (profit making business!)

11. And this … a loss making business..

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

13. 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

14. Business Costs

15. 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!

16. 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

17. Costs of the Channel Tunnel

18. Costs of a local market trader

19. Costs of Amazon.com

20. Costs of a restaurateur

21. Costs of a theme park eg Thorpe Park

22. The costs for a ‘typical farmer’!

23. Costs for Royal Mail

24. Costs for Google

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

26. 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

27. 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

28. 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

29. 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

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

39. 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

40. 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

41. 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

42. 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

43. 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)

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

45. 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!

46. 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!
A2 Economics - Unit 3 - Mrs G

47. 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!

48. 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?

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