0 D Vocabulary

Complete each sentence with a word or phrase from the box.

interest keep track of loan

maintain minus nasty part-time rate relationship

revenue the short t e r m

:I what I spend by writing

everything down in a notebook

There is a between the quality of a produci and its cost. A company's total is all the money it receives from sales.

is the next few weeks or months

The long term may be the next years or decades.

Five three is two. Factories have to then machines to

keep them working properly.

A worker works lor only a few

hours a day or a few days per week. When someone or something is they aren't nice at all. И you borrow money from a bank, you have to

Variable

Costs 1С)

Variable

Costs ( € )

tone ЛЮО .1000 4000 5000 6000 /000 M00 9000 10000

Production units (e.g. pens)

Figure 4: Dis economy of scale

t000 2000 3000 4000 S0006000700080009000 10000

Production units (e.g. pens)

pay it back with an extra charge which is called

Costs and supply

When somebody lends money, they are giving a

The at which something happens is how fast it occurs.

( j>inpanics have to spend m o n e y in order to make money T h e money they spend to manufacture their goods or pro\ jde llleil sel\ ices are called ei».s/.s. Costs ire important. Any company that doesn't k e e p track of costs will soon Ik in trouble. And there are many different kinds of costs to keep track of such as tiw il coata and variablt casts

W h y an. costs importantV Well, for two reasons Firstly, there is a relationship between costs and firoht. Profit is overall reventn minus costs Secondly, there is a relationship between costs and supply To understand this relationship. \че need to look at some types of cost

Mir**' IаЯ СJ 3* to С J n Q I- U• I 5 27

Micro nics: the science с ;mer and firm behaviour

O n e type is fixed costs. Fixed costs are costs that don't change. T h e y are costs that the c o m p a n y has to pay each month, for e x a m p l e , or each year. T h e value of fixed eosts will not rise or fall in the short term. Examples include the rent the c o m p a n y pays, the interest t h e y have to pay each m o n t h on any loans and the salaries they have to pay for p e r m a n e n t employees. T h e good news about fixed costs is that they don't change with increases in production. For example, imagine a c o m p a n y produces 1,000 pens in January and 2,000 pens in February. T h e rent for the factory remains the same for both months.Variable costs, however, change ( v a r y ) with the size of production. T h e m o r e pens the company produces, the m o r e these costs increase. Examples of variable costs are the raw materials needed for production, the cost of electricity and the cost of maintaining machines that are working more. Also, the c o m p a n y may need to get m o r e part-time employees. T h e i r hourly pay is another variable cost. In unit 1 we said that the price of a product or service increases as supply increases. Variable eosts are the reason why.

Bj E Comprehension

N o w read the text again and answer these questions in your own words in the space provided below.

1 What are costs?

2 Why are costs important? 3 What are fixed costs? 4 What are variable costs? 5 Why is an economy of scale good? 6 Why is a dis-economy of scale bad?

Notes:

Before you listen

In a perfect world, variable costs will increase steadily as production increases. T h i s is called constant return to scale and it is shown in figure 3 on page 27. However, this is not a p e r f e c t world! Sometimes, variable costs rise at a faster rate than production. This nasty situation, which is called a dis-economy of scale, is shown in figure 4 on page 27. On the other hand, c o m p a n i e s sometimes get lucky. Variable costs can rise at a much slower rate than production. T h i s is called an cconomy of scale, and is shown in figure 5 below.

Figure 5: Economy of scale