Summary of Economics of Strategy Book Essay

The average costs of production of Sony’s new product is the total costs (the addition of fixed and variable costs) divided by the output which is the quantity of goods or services that are produced during the production run.

The Marginal Cost graph intersects the Average Total Cost graph and the Average Variable Cost graphs at their minimum points. As long as the cost of producing one additional unit remains less than average total cost, the average total cost continues to fall. When marginal cost finally exceeds average total cost, average total cost begins to rise in response. The same effect applies to the relationship between marginal cost and average variable cost.

(Long-Run Costs) Suppose the firm has only three possible scales of production as shown below:

Economies of scale occur when increased output leads to lower unit costs (lower average costs)

One of the basic parts of cost accounting is to gauge the cost of tangible or intangible product or service. All costing models are attempting to discover the "correct" cost 1.e actual cost without any cost variances for all cost objects, for example, product, profit, segment, and division. costing methodologies all over the world apportion overhead by utilizing volume- driven measure, for example, unit transformed to first gauge a foreordained overhead rate then assign overhead by applying this normal overhead rate to the cost object. Requisition of such models is authentic for offices generating goods with less differing qualities. In any case, as manufactured goods differ, the wide averaging methodology prompts severe cost variations

Marginal cost is the total cost of an additional input required in the production of that output. In formal terms, marginal cost is derived from the total costs of production with regards to the output level. 1. Explain its relationship with the total cost.

CI uses standard unit costs to measure performance and profit potential. In this cost system, each materials and labor input is given a standard usage, and production managers are evaluated on their ability to meet or improve upon these standards. Differences from the standard were called “variances.” For example, if a certain manufacturing operation required at standard 5 minutes, the operator would be expected to complete a lot of 100 parts in 500 minutes. If actually 550 minutes were required, there would be a 50 minute unfavorable variance. Also, using the operator’s wage rate, the cost of the variance could be calculated.

(iii) Economies of scale is where the long-run average cost declines as production increases in simple explanation

Larger firms tend to have lower cost compared to smaller firms, due to the fact that they are able to gain from economies of scale, but it is possible for larger firms to experience diseconomies of scale. As firms increase their production scale they tend to lower their production cost and move to the long run, this can be represented using the diagram

Average cost is the production cost per each unit of output. This can be calculated by dividing the total costs of the business by the number of units

Economies of scale mean larger firms can produce at lower cost per unit. This tends to lower the number of firms in the industry and reduce competition.

Therefore if the variable unit of production is increased, there comes a point where it will become less productive and therefore there will eventually be a decreasing marginal and then average total cost.

The cost concept AVC shows a company the average per unit cost including both variable cast and fixed cost. This information is use to determine the price a company should sell the product for to make a profit. AVC is determined by the total variable cost and the quantity if the price is higher than the AVC then the company is making a profit if price is lower the company may close down because the cost of producing 1 unit is much higher the the price for that 1 unit

Production cost- cost to operate products or service for a product for a business. For example, cost of manufacturing a product like material and labour.

Increasing returns are the natural outcome of decreasing output costs and have external and internal factors which influence economies of scale (Ossa, n.d.). Economies of scale are influenced externally by industry size, rather than firm size and include