Fixed Factor input that cannot be increased within a given T Variable Factor

Law of DMR = when increasing amounts of a variable factor are used with a given amount of fixed factor, there will come a point where each extra unit of the variable factor will produce less extra output than the prev one.

TC = TFC + TVC
MC = change in TC generated by producing one more unit of output AFC = TFC/Q AVC = TVC/Q AC = TC/Q = AFC + AVC

U shaped curve Output rises, AC falls, due to invisibilities in production, benefits of specialization (IEOS > LRAC) As we approach IDOS, turns out that the IEOS < LRAC IDOS

Technical Using large scale equipment that will help to reduce AC and increase output significantly (increased dimensions) Specialization and division of labour this increases efficiency during production of output and less time lost And more efficient use of resources in large plants

managerial Professionals working together within a firm, can aid in the aim of rationalizing and streamlining the work processes Division of work also helps to increase experience within their own areas of responsibility efficiency Decentralization of decision making processes increases efficiency of management

Marketing or Commercial IEOS Large firms! Bargaining advantage, unit cost of transportation of supplies is lower because Economies in selling: can be due to bulk advertising and extensive, large scale promotion cost is spread over a large output and thus sales, thereafter.

Financial IEOS - Large firms! Easier and cheaper to raise funds Like from banks - Public confidence Research and development IEOS - Improvement in techniques, further fall in AC

EOS IEOS shown as movement downwards ALONG curve EEOS shown as total downward movement of curve

SAME GOES FOR EDOS AND IDOS

Complexity of management Ownership and management may become more divorced, resulting in the principal-agent problem - Incentives for managers to reduce costs may diminish - Rigid organizational system time lags loss of efficiency - Strained relationships impersonal, sloppy work attitudes, lose of efficiency, AC could increase
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Industry grows in size impact on AC of production Definition: Savings in costs that occur to all firms as a result of the expansion of the industry/concentration of firms LRAC curve (entire) shifts downwards

High concentration of firms in same area mutual benefit, skilled LF, better transportation, market facilities Training centre set up, develop training facilities together, lower costs Shared infrastructure, costs are lower Brand name is built up Steady cliente

Increased strain on infrastructure Maxed out eg traffic congestion Rising factor costs Competition for resources, causing prices to hike up

DIFFERS ACROSS INDUSTRIES e.g capital intensive ones that enjoy lower unit cost at higher output will have a large scope of IEOS

To exploit available IEOS and thereby lowering cost, edging out rivals, gain market share Diversificaiton of goods e.g. Virgin
Sale of by-products

Market power (more financial rcs, more output for sale, reaping of IEOS over a larger output level) (INCREASE BTE)

Q(output sold) Sales turnover Market share Number of employees


1) 2)

They exist because

DD side: nature of product (perishables, etc), specialized products, geog limitations SS: reaching MES at low levels of output