3.3 Flashcards
What are economies of scale?
A reduction in Long Run Average Cost (LRAC) as output increases.
What are the types of economies of scale?
- Risk bearing: Increased size spreads risk.
- Financial: Increased size allows control over suppliers and lower interest rates due to lower risk for banks.
- Managerial: Increased size enables employment of specialist managers, increasing productivity.
- Technical: Use of specialist machinery increases productivity.
- Marketing: Increased size allows bulk buying of advertising.
- Purchasing: Increased size enables bulk buying, leading to specialist discounts.
What are diseconomies of scale?
An increase in Long Run Average Cost (LRAC) as output increases.
What are the causes of diseconomies of scale?
- Control: Difficult to manage due to size, leading to decreased productivity.
- Communication: Harder to communicate, taking longer and decreasing productivity.
- Coordination: Increased size makes it harder for departments to work together, decreasing productivity.
- Motivation: More workers lead to less chance of promotion, making them feel useless and decreasing productivity.
What are internal economies of scale?
Advantages to a firm due to growth independent from the industry or other firms (RFMTMP).
What are external economies of scale?
Advantages arising from growth in the industry in which the firm operates, such as:
- Better infrastructure leading to lower costs.
- Suppliers moving closer naturally, resulting in lower costs.
- Firms hiring workers already trained by the firm, decreasing costs.
What is minimum efficient scale?
The minimum amount of output needed to fully exploit economies of scale.
What is the short-run condition to stay in the market?
If Average Revenue (AR) > Average Variable Cost (AVC), stay in the market.
What is the long-run condition to stay in the market?
If Average Revenue (AR) > Average Total Cost (ATC), stay in the market.
