3.3 Flashcards
financial economies of scale
Lower interest rates due to security of being a large firm as they are unlikely to go out of business quickly
More accessible investments
Risk bearing economies of scale
Large companies can produce products in a range of markets meaning if one area of business fails their whole business will not collapse
Managerial economics
Large companies can afford to appoint specialist managers in every field.
This helps them lower average costs
Purchasing economies of scale
Large firms can buy cheaply in bulk
Can afford to take on specialist buyers and sellers
They transport large batches which makes distributing cheaper per unit
Total revenue
Price per unit x qd
Revenue
Income generated from the sales of goods
Mr
Change in revenue from selling extra units of output
Change in TR/ change in QD
Mc = ac at which point
Lowest point on the ac curve
Cricket example
Increasing returns to scale
If an increase in factors of production leads to a more than proportional increase in output
Minimum efficient scale
Lowest possible output at which all economies of scale have been exploited and a firm achieves productive efficiency
External economies of scale
When an industry as a whole grows benefiting firms in the economy
E.g Silicon Valley- attracts high skilled workers to area, reducing training costs
Causes LRAC to shift outwards
Support services move closer to area
Dynamic pricing
Pricing which can change due to demand
Sporting tickets, Uber, train tickets, google ads , price of flights
Examples of diseconomies of scale
In large businesses people can feel irrelevant and lose motivation, feel like work is going unnoticed
Distances between different stages of production, quality can be hard to control
Slow response to change
Increase price of raw materials
Difficult to manage, coordination and control
Break even point
Tr = tc
Fixed cost/ r - vc = break even point
Why monopolies have a low mes
Fixed costs are very high relative to variable costs, this acts as barriers to entry
This allows companies that are in the market to reduce unit cost by increasing the scale of output
This results in a concentrated market structure as new businesses have to compete with extremely low pricing that the existing firm has forced down
Technical economies of scale
Specialisation of workers and machine
Balanced team of machines
Indivisibility of Capital
Research and development
Evaluating economies of scale
All business can exploit some internal economies of scale
Due to market demand technology that would reduce unit cost may not be feasible
Dynamic pricing may help achieve this, if firm is in an industry where dynamic pricing is not feasible this may restrict them
Small business can thrive even in a market dominated by scaled business e.g restaurants
Marginal revenue
Intrest of shareholders are a priority
The change in revuene from selling one extra unit of output
Chnage in total reveune/ change in quantity
Generates funds for investement
Profit maximisation
Mc = mr
Supernormal profits are their greatest
Revenue maximisation point
When firms are willing to aww products untill the last unit sold adds to no revenue (mr = 0)
Shown with mr+ar diagram and total revuene curve
Sales maximisation point
Occurs when firm attempts to sell as much as it can without making a loss
This occurs where average cost equals average revenue
Allocative efficiency
When p = mc, socially optimum price
Price payed for the good is equal to the cost of the factors of production used to manufacture the last unit
Stratergies to gain market share
Predatory pricing - pricing below costs
Limit pricing - pricing at ar = ac in order to discourage entry
Non price competition- may lead to price wars, adversting, packaging, after sale service, product development, innovation
Internal economies of scale
Occur when a firm becomes larger. Avergae costs of production fall as output increases
