3- Economies and diseconomies of scale definitions

Question 1

Economies of scale

Answer 1

The advantages of large scale production that enable a large business to produce at a lower average cost than a smaller business.
A reduction in LRAC as output increases.

Question 2

Diseconomies of scale

Answer 2

The disadvantages that arise in large businesses that reduce efficiency and cause average costs to rise.
An increase in LRAC as output rises.

Question 3

Internal economies of scale

Answer 3

An advantage that a firm is able to enjoy because of growth in the firm, independent of anything happening to other firms or the industry in general.

Question 4

External economies of scale

Answer 4

An advantage which arises from the growth of the industry within which the firm operates, independent of the firm itself.

Question 5

Minimum efficient scale

Answer 5

The lowest level of output necessary to fully exploit economies of scale.

Question 6

Constant returns to scale

Answer 6

Output increases by the same proportion that the inputs increase by.