Category: Micro-Cost

  Description This video explains what the experience curve is. We start by learning how to build an experience curve, then we compare two companies competing with the same learning curve, and finally we analyse two particular scenarios. - The experience curve (not to be confused with learning curve) is a graphical representation of the phenomenon explained in the mid-1960s by Bruce D. Henderson, founder of the Boston Consulting Group. It refers to the effect that firms learn from doing, wh...

  Description This video explains what the learning curve is. We start by learning how to build a learning curve, and then we compare two companies competing with the same learning curve. - The learning curve (not to be confused with experience curve) is a graphical representation of the phenomenon explained by Theodore P. Wright in his “Factors Affecting the Cost of Airplanes”, 1936. It refers to the effect that learning had on labour productivity in the aircraft industry, which translates...

  Description This video explains what economies of scope are. We analyse how different production possibility frontiers show different types of economies (or diseconomies) of scope. - The concept of economy of scope is very similar to that of economies of scale. When we talk about economies of scope, we mean that average costs are reduced by introducing another product into our portfolio that can share some of the infrastructure or know how, thus reducing overall average cost per product. ...

  Description This video explains what subadditivity is. We start with economies of scale for one firm, and then analyse what happens when a second firm enters the market. - Subadditivity is an important concept because it is often used to justify imperfect competition, the classic nemesis of neo-classicists. The only real way to justify less than perfect competition is the kind of sector that lends itself to natural monopolies. Natural monopolies are those where barriers to entry are so hi...

  Description This video explains how economies of scale affect production. We start by explaining how the average cost curve defines when economies of scale appear, and then analyse the difference between economies and diseconomies of scale. - This economic phenomenon occurs when increasing output is translated into a decline of the firm’s average cost of production. Alfred Marshall was the first economist to distinguish economies of scale depending on their origin: Internal economies of s...

  Description In the long run, no cost is fixed. This video explains how to analyse cost curves in the long run. We'll see how they form derived from multiple short run cost curves. - We can determine our production level and adjust plant sizes, investment in capital and labour accordingly. This gives us unlimited options. Depending on the scale we choose to implement, each level of production will be associated to new, short run cost curves. When we exhaust the infrastructure these provide...

  Description This video explains how costs behave in the short run, and analyses when a company should start producing. - In the short run, fixed costs include capital, K, whereas labour, L, is considered variable. Fixed costs are usually represented as a horizontal line and do not vary whatever level of production we achieve. The video shows two phases. In the first phase (I), variable costs (and therefore total costs, seeing as fixed costs are a constant) grow slower than growth at first...

  Description This video explains how average and marginal costs are calculated. Starting from fixed and variable costs, we analyse how average and marginal costs behave. - Average costs are those associated to one unit of production. Costs per unit grow quicker as production increases, so we find the arithmetic average as the sum of costs divided by the sum of production. Marginal costs are also a very important concept in Economics because they show costs at a very specific point in time:...

  Description This video explains how different types of costs affect the production process. We start by explaining the main characteristics of fixed and variable costs, and how these form total cost. Finally, we explain its relationship with returns to scale. - When analysing costs, the first thing to know is that there are fixed and variable costs: Fixed costs: fixed costs cannot be altered in short run. They mainly include things like rent, repayments on technology, etc., which require ...