3.3.3 Flashcards
Internal economies of scale
These occur when a firm becomes larger
AC of production fall as output increases
Examples of internal economies of scale
RFMTMP
R isk bearing - when a firm becomes larger, they can expand their production range
F inancial - banks are willing to lend loans more cheaply to larger firms
M anagerial - larger firms are more able to specialise and divide their labour
T echnological - larger firms can afford to invest in more advanced and productive machinery and capital, which will lower their average costs
M Arketing - larger firms can divide their marketing budgets across larger outputs
P urchasing - larger firms can bulk buy, each unit will cost them less
Network economies of scale
These are gained from the expansion of ecommerce
Can add extra goods at very little cost, but the revenue gained from this will be significantly larger
External economies of scale
These occur within an industry when it gets larger
Eg, local roads might be improved, so transport costs for the local industries will fall
Diseconomies of scale
These occur when output passes a certain point and average costs start to increase per extra unit of output produced
Examples of dieseconomies of scale : the 3 C’s
Control - it becomes harder to monitor how productive the workforce is, as the firm becomes larger
Coordination- it is harder and complicated to coordinate each worker, when there are thousands of employees
Communication: workers may start to feel alienated and excluded as the firm grows, could lead to a fall in productivity and increases average costs
Long run average cost curve
Initially, Average costs fall, since firms take advantage of economies of scale- this means average costs are falling as output increases
After the optimum level of output, where average costs are at their lowest, average costs rise due to diseconomies of scale
