Now listen and check your answers.

Why arc costs important?Well, for two reasons Firstly, there is a relationship between costs and profit. Profit is overall revenue minus costs. Secondly, there is a relationship between costsand supply To understand this relationship, we need to look at some types of cost.

(28)

One type is fixed costs. Fixed costs are costs that don't change. They are costs that the company has topay each month, for example, or each year. The value offixed costs will not rise or fall inthe short term. Examples include the rent the company pays, the interest they have topay each month on any loans and the salaries they have to pay for permanent employees. The good news about fixed costs isthat they don't change with increases inproduction. For example, imagine acompany produces 1,000 pens in January and 2,000 pens inFebruary. The rent for the factory remains the same for both months. Variable costs, however, change (vary) with the size of production. The more pens the company produces, the more 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 company may need to get more part-time employees. Their hourly pay isanother variable cost. In unit 1 we said that the price ofa product or service increases assupply increases. Variable costs are the reason why.

In aperfect world, variable costs willincrease steadily asproduction increases. This iscalled constant return to scale and itis shown in figure 3 on page 27. However, this is not a perfect world! Sometimes, variable costs rise at afaster rate than production. This nasty situation, which is called a dis-economy of scale, isshown infigure 4 on page 27. On the other hand, companies sometimes get lucky. Variable costs can rise at amuch slower rate than production. This is called an economy of scale, and isshown in figure 5 below.

_

E Comprehension

Now 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

Discuss the following with your partner.

 Price is not only the cost of something. Every purchase has a hidden cost. What do you think this is?

F Listening )))

You're going to hear about another kind of cost called opportunity cost. Listen and choose the best answer for each question. Then listen again and check your answers.

1 What is opportunity cost?

A Something you have to give up in order to

have something else. В Something a company can charge people for

goods or services. С Something that companies pay when they first

start business.

2 What could be the opportunity cost of watching television?

A Getting sore eyes.

В The cost of buying a television.

С Not sunbathing in the garden.

3 What is the opportunity cost for Alice's decision?

A £3,000 В £39,000 С £13,000

(29)

G Speaking

Discuss these questions with your partner.

How do you make decisions about what to buy?

 Do you think people make rational decisions? Why/Why not?

Task

Imagine you are the manager of a small manufacturing business (you decide what the company makes). Give a short talk to your employees explaining what the company's costs are.

First, read the texts again and make notes on the following:

 fixed costs

 variable costs

Does your company have an economy of scale?

Notes:

Pronunciation guide

Utility                             

Marginal

 Revenue

Employee

Constraint

H Writing

You're the librarian at your school. The head teacher has asked you to buy some, more materials for the library. You can choose from the following.

  books, including fiction for teenagers, poetry. special interest and hobby books (€10 each)

 magazine subscription for one year (either a music magazine or a fashion magazine) (€50)

 educational CD-ROMS for science, history and technology (€20 each)

 a set of encyclopaedias (€100)

Your budget constraint is €200.

E-mail to your head teacher

Write an e-mail to your head teacher explaining the budget constraints you have. Tell him or her what you want to buy and why.

PARAGRAPH 1

Explain why you're writing.

Useful words and phrases:

Dear ... I'm writing in order to

PARAGRAPH 2

Explain your budget constraints and the costs of materials.

Useful words and phrases:

Our current budget constraint is...

There are a range of materials that we could

buy: These include...

PARAGRAPH 3

Say how you intend to spend the money.

Useful words and phrases:

After careful consideration. I think the best purchases would be...

PARAGRAPH 4

Give reasons why you have chosen to spend the money in this way.

Useful words and phrases:

I have chosen, because, would be a good purchase because, would be very useful for, first, next, in addition, finally

Sign off in a polite way

(30)

Before you read_

Discuss the following with your partner.

Here are some things that affect how a market operates. How important do you think each one is?

 the size of companies

 what products and services are like

 what information consumers and companies have about products

 ease of entry into the market for companies

 companies having the resources and technology they need