(1) LR Costs Graph and Internal EOS

Question 1

How do you draw the LRAC curve ?

Answer 1

It is a longer version of the SRAC curve.

Question 2

How is the SRAC and LRAC curve related ?

Answer 2

There are different periods of ATC which go up to a certain quantity and continue expansion as output increses. There is a new short run each time. As output increases and you connect up the SRAC, this makes up the LRAC.

Question 3

As Quantity increase, what happrns to LRAC ?

Answer 3

LRAC will decrease and then increase. As LRAC decrease and output increase economies of scale occur. As LRAC increase and output increase idseconomies of scale.

Question 4

What do firms need to do to expand in future ?

Answer 4

They need to consider the AC curve

Question 5

As firms expand what happend ?

Answer 5

The AC curve will go down.

Question 6

What are economies of scale ?

Answer 6

This is when output increase and the LRAC goes down. The cost advtanges are reaped by firms when production becomes efficient and costs spread over a large amount of goods sold.

Question 7

As output increases what should firms try to do ?

Answer 7

Firms will try to exploit economies of scale

Question 8

How do you remember the 6 types of internal economies of scale ? and what are they

Answer 8

Richard's mum flies past the moon.
R
M
F
P
T
M
RIsk bearing, managerial, financial, purchasing, technical, marketing economies

Question 9

What are internal EOS ?

Answer 9

This is when a firm’s own output increases and also reduces LRAC

Question 10

What are external EOS ?

Answer 10

this is when the entire’s industry, output increases reducing LRAC

Question 11

What is the difference between internal EOS and external EOS ?

Answer 11

Internal EOS is when a firm grows and expands and a External EOS is when a industry expands and grows bigger

Question 12

What are purchasing economies and how does it relate to small firms and large firms ?

Answer 12

This is when larger firms can buy and have the output to get raw material and products in bulk. A smaller firm won’t be able to afford to buy in bulk as their costs will be too much as they won’t be able to cover it.

Question 13

How does bulk buying reduce costs and give examples ?

Answer 13

When firms expand and buy in bulks, they will be able to buy huge quantities in lower prices. Firms will be able to exploit purchasing economies through bulk buying and they will be able to negotiate lower prices. For example McDonalds are very large firms that buy that bulk buy their products and is a huge customer to the suppliers. Threfore, if Mcdonalds want a lower price the suppler will have to agree or they have a risk of losing Mcdonalds as a customer and that can be a huge loss to profits.

Question 14

What a technical economies ? and how does it relate to small and big firms ?

Answer 14

Bigger firms can afford high technology specialist capital and will be able to buy them as they make enough output. Smaller firms wouldn’t be able to buy this equipment because it would be too costly for them

Question 15

When can firms only exploit technical economies ?

Answer 15

Once firms have scaled and exapnded they can exploit techinical economies by investing specialist capital which increases productivity and reduces costs.

Question 16

What are managerial economies ? and how does it relate to small and large firms

Answer 16

This is when firms hire specialist managers who are skilled in their specific jobs. This will therefore increase productivity and reduce LRAC. Smaller firms cannot afford hiring specialist staff as it will be too expensive for them. Larger firms can afford this and explore managerial economies of scale

Question 17

What are marketing economies of scale ? and how does this relate to small and large firms

Answer 17

Small firms cannot afford spending so much on advertisement as it will be too costly for them. Howver, big firms can afford them as their costs are spread out and will be covered across the large amount sold each year. They can exploit marketing economies of scale and decrease LRAC

Question 18

What are financial economies ? and given exn example of a company growing

Answer 18

This is when banks will be more likely to lend to firms who have less of a risk. Companies who have a low risk will be given low interest rates by firm and those with high risk will be given high interest rates. As firms grow bigger thye make more sales and profit. Therefoe they will become less of a risk and can borrow from the bank at lower interest rates which means lower repayment costs decreasing LRAC.

Question 19

How are small firms and large firms related to financial economies ?

Answer 19

Smaller firms have higher risk of failure as they are a small company and will be given high interest rates this will be enough reward to offset the bank’s huge lending with high repayment costs and increase LRAC. Bigger firms can reap the cost advantages as they will have a lower risk failure of going bankrupt and would have cheaper interest loans lowering LRAC

Question 20

What are risk - bearing economies ?

Answer 20

This is when a big company use their profits to diversity new projects and grow bigger and have a continous diversification of new ventures. This way even if buisness go bankrupt, costs will be minimized as there are many other ventures already invested in and will have little impact. An example is Virgin

Question 21

How do bigger and small firms relate to risk bearing economies ?

Answer 21

Smaller firms do not have enough profit and are not big enouhg to diverify and os will have a huge cost of failure. Larger firms will be able to exploit risk bearing economies of scale and diversify into new sectors reducing costs of failure.

Question 22

What do firms to do to try and reduce LRAC ?

Answer 22

They can exploit internal EOS.

Question 23

Do internal economies of scale work in short run and long run ?

Answer 23

Internal EOS only work in the long run and does not work in the short as it will not have enough time.