3.3.3 Flashcards
what happens in long run
there are no fixed inputs - all are variable
what are constant returns to scale
output increases in the same proportion as all input (e.g if you double inout of land, output of 100 units doubles to 200)
what are increasing returns to scale
output increases more than in proportion to the increase in all inputs: given a percenatge increase in all inputs, output increases by a larger percentage
what are decreasing returns to scale
output increases less than in proportion to the increase in all inputs: given a percenatge increase in all inputs, output increases by a smaller percentage
difference between decreasing and diminishing returns
- diminishing only occurs in the short run bc they show what happens to output as a variable input is added to a fixed input
- decreasing returns to scale can occur only in long run showing what happens to output when all inputs are variable
define economies of scale
Falling long run average cost as output increases in the long run.
define diseconomies of scale internal
A business may expand beyond the optimal size in the long run and experience diseconomies of scale. This leads to rising LRAC. For example, a firm increases all inputs by 300%, its output increases by 200%.
define minimum efficient scale
Scale of production where internal economies of scale have been fully exploited. Corresponds to the lowest point on the long run average cost curve (LRAC).
define returns to scale
In the long run, all factors of production are variable. How the output of a
business responds to a change in factor inputs is called returns to scale.
difference between internal and external economies of scale
internal = Reductions in long run average cost from an expansion of the size of a business
external = When the expansion of an industry leads to the development of ancillary services which benefit suppliers in the industry – causing a downward sloping industry supply curve. A business might benefit from external economies by locating in an area in which the industry is already well-established.
define external diseconomies of scale
When the growth of an industry leads to higher costs for businesses that are part
of that industry – for example, increased traffic congestion, higher costs of
renting buildings.
technical economies of scale
- increased dimensions: the larger the container, the lower the average cost of storage (volume increases proportionately more than SA when length increases)
- indivisibility of capital: some processes require huge items of machinery and investment that make it only possible for them to produce on large scale
- research and developments: only large firms cn afford to carry out larg scale RND so they are able to gain a large advantagr over competitors
managerial economies of scale
- large firms will be able to appoint specialist workers and buy specialist machiens which can do jobs more quikclu than unspecialised machines/workers and make better decisions
- but when org gets so large and complex that management finds it more difficult to manage so disec of scale occuir as average costs rise with increase in ouput
- number of managers a firm needs doesn’t usually depend directly on production scale so management cost per unit reduces
marketing economies of scale
- advertising is a fixed cost, spread over more units for large firms so cost per unit falls with growing production
-larger firms have brand awareness and customer loyalty so less spent on advertisement
financial economies of scale
- lrge firms have greater security as they have mroe assets and are therefore less likely to fail overnight
- easier for them to obtain finance and interest rate is lower as they are low risk so investment is more accessible
risk bearing economies of scale
large companis operate in range of diff markeys producing diff products which means that if one biz area fail , whole biz doesn’t collapse
purchasing economies of scale
- buying in bulk: get a cheaper price if buying in bulk
- specialisation: biz can afford to take on specialist buyers and sellers who can be more efficient due to extra time and knowledge
external economies of scale explanation
- businesses established in an areas with other successful firms attract skilled labour e.g silicon valley so less cost asnd time on recruiting
- local education and training providers develop courses to prep people for work in those big biz
- firms can hire staff trained by other successful biz so cheaper and more efficient than training workers themselves
diseconomies of scale in management
- coordination: poorer coordination, lack of monitoring and controlling work due to complex structure so poorer quality goods, bad decisons and inefficiencies
- comms: becomes slow and inaccurate as it is passed on by lots of people to reach destination
- poorer worker motivation: workers feel unimportant, bored, demotivated and become inefficient so average unit costs rise
diseconomies of scale elsewehere
- increase in demand for raw materials and eqt causes prices to rise and production costs rise esp if whole industry increase and firms bid price up
- geogrpahy: transport finished products far away and harder to control distant branches of the firm
