3.3

Question 1

financial economies of scale

Answer 1

Lower interest rates due to security of being a large firm as they are unlikely to go out of business quickly
More accessible investments

Question 2

Risk bearing economies of scale

Answer 2

Large companies can produce products in a range of markets meaning if one area of business fails their whole business will not collapse

Question 3

Managerial economics

Answer 3

Large companies can afford to appoint specialist managers in every field.
This helps them lower average costs

Question 4

Purchasing economies of scale

Answer 4

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

Question 5

Total revenue

Answer 5

Price per unit x qd

Question 6

Revenue

Answer 6

Income generated from the sales of goods

Question 7

Mr

Answer 7

Change in revenue from selling extra units of output

Change in TR/ change in QD

Question 8

Mc = ac at which point

Answer 8

Lowest point on the ac curve

Cricket example

Question 9

Increasing returns to scale

Answer 9

If an increase in factors of production leads to a more than proportional increase in output

Question 10

Minimum efficient scale

Answer 10

Lowest possible output at which all economies of scale have been exploited and a firm achieves productive efficiency

Question 11

External economies of scale

Answer 11

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

Question 12

Dynamic pricing

Answer 12

Pricing which can change due to demand

Sporting tickets, Uber, train tickets, google ads , price of flights

Question 13

Examples of diseconomies of scale

Answer 13

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

Question 14

Break even point

Answer 14

Tr = tc

Fixed cost/ r - vc = break even point

Question 15

Why monopolies have a low mes

Answer 15

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

Question 16

Technical economies of scale

Answer 16

Specialisation of workers and machine
Balanced team of machines
Indivisibility of Capital
Research and development

Question 17

Evaluating economies of scale

Answer 17

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

Question 18

Marginal revenue

Answer 18

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

Question 19

Profit maximisation

Answer 19

Mc = mr

Supernormal profits are their greatest

Question 20

Revenue maximisation point

Answer 20

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

Question 21

Sales maximisation point

Answer 21

Occurs when firm attempts to sell as much as it can without making a loss
This occurs where average cost equals average revenue

Question 22

Allocative efficiency

Answer 22

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

Question 23

Stratergies to gain market share

Answer 23

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

Question 24

Internal economies of scale

Answer 24

Occur when a firm becomes larger. Avergae costs of production fall as output increases

Question 25

Technological economies of scale

Answer 25

Larger firms can afford to invest in more advantced and productive machinery and captial, which lowers their average costs

Question 26

Marketing economies of scale

Answer 26

As a firm expands its product range it is able to use any central brand marketing to advertise the range at very little extra cost

Question 27

Satisficing

Answer 27

Principle agent probelm - owners and directors will have different goals
Set price so there is Enough profit to keep owners happy whilst following other objectives