3.3.3

Question 1

In the long run all factors of production are what?

Answer 1

Variable

Question 2

What is returns to scale?

Answer 2

How the output of a business responds to a change in inputs

Question 3

In the long run businesses look for an output that combines what?

Answer 3

Labour and capital to maximise productivity and recues unit costs towards their lowest level

Question 4

What is capital-labour substitution?

Answer 4

Capital machinery and new technology replaces labour input

Question 5

What is economies of scale?

Answer 5

The unit cost advantages from expanding the scale of production in the long run.

Question 6

Economies of scales exist when?

Answer 6

Long run average costs fall as output rises.

Question 7

What do lower costs represent?

Answer 7

Improvement in productive efficiency and gives a business a competitive advantage

Question 8

If the long run average total cost curve is declining then what is being expolited?

Answer 8

Internal economies of scale are being exploited by a business.

Question 9

What are technical economies of scale?

Answer 9

-Expansive capital inputs
-Specialisation of the workforce
-Law of increased dimensions
-Learning by doing

Question 10

What is expansive capital inputs as a technical economies of scale?

Answer 10

Large-scale businesses can afford to invest in specialist capital machinery

Question 11

What is specialisation of the workforce as a technical economies of scale?

Answer 11

Larger firms can split the production processes into separate tasks to boost productivity

Question 12

What is law of increased dimensions as a technical economies of scale?

Answer 12

Doubling the height and width of a tanker or building leads to a more proportionate increase in cubic capacity

Question 13

What is learning by doing as a technical economies of scale?

Answer 13

The average cost of production decline in real terms as a result of production experience as a business cuts waste and finds the most productive means of producing output on a bigger scale.

Question 14

What is purchasing economies?

Answer 14

A large firm can purchase factor inputs at bulk in lower prices if it has monopsony power

Question 15

What is managerial economies of scale?

Answer 15

Division of labour where firms employ specialists to supervise production systems

Question 16

What are financial economies of scale?

Answer 16

The financial market usually rate larger firms to be more ‘credit worthy’ and have access to credit with favourable rates of borrowing
(smaller firms often pay higher interest rates)

Question 17

What is network economies of scale?

Answer 17

Some networks are more widely used and become more valuable to a business. The marginal cost of adding one more user/customer to a network is close to zero, but financial benefits may be huge as they can trade with members in the network.

Question 18

When do external economies of scale occur?

Answer 18

When a whole industry benefit from lower long-run average costs

Question 19

What is the cluster effect as a factor of external economies of labour?

Answer 19

If firms locate to a similar area, this makes it more efficient for suppliers to meet a larger base of purchasers

Question 20

What is skilled labour as a factor of external economies of labour?

Answer 20

If similar firms locate to a certain region it will encourage skilled labour to seek work in this area.

Question 21

What are factors of external economies of scale?

Answer 21

-Cluster effect
-Skilled labour
-Transport links
-Supportive legislation

Question 22

What are diseconomies of scale?

Answer 22

Increases in the unit cost of supply in the long run due to decreasing returns to scale

Question 23

Diseconomies of scale mean what?

Answer 23

-Businesses moved beyond optimum size
-Businesses suffer productive inefficiency
-Breakdowns in communication
-Workers’ morale can suffer reducing productivity increases unit costs
-Lost competitiveness lead to decline in market share

Question 24

What are the causes of diseconomies of scale?

Answer 24

-Control and communication problems
-Co-operation problems
-Negative effects of internal corporate poltics

Question 25

How does control and communication problems cause diseconomies of scale?

Answer 25

Problems in monitoring productivity and work quality, risking increasing wastage of resources which adds to costs but not total output

Question 26

How does co-operation problems cause diseconomies of scale?

Answer 26

Workers in large firms may develop a sense of alienation and loss of morale.

Question 27

What are consequences of diseconomies of scale?

Answer 27

-Lead to a rise in a firm’s long run average cost of production.
-Result from a business expanding beyond an optimum size and losing productive efficiency
-Higher long run average costs will reduce profitability of a business if their prices remain the same

Question 28

What is the minimum efficient scale (MES)?

Answer 28

The scale of production where all of the internal economies of scale have been fully exploited

Question 29

What does the minimum efficient scaled correspond to?

Answer 29

The lowest level of output at which the lowest point on a firm’s long run average cost curve is reached.

Question 30

In a natural monopoly the minimum efficient scale (MES) is likely to be what?

Answer 30

High

Question 31

MES is likely to be low relative to what?

Answer 31

The size of market demand in a very competitive industry

Question 32

What are the 3 causes for why a business will have high minimum efficient scale (MES)

Answer 32

-MES is high when fixed costs of setting up production are large.
-MES is high when marginal cost of supplying extra customers is low relative to foxed costs.
-Natural monopoly LRAC may fall across entire range of output which means that the MES is very high % of total market demand

Question 33

What are examples of markets with a high MES?

Answer 33

-Water, gas and electricity supply
-Underground transport systems
-Social networks and search engines

Question 34

What are example of markets with a low MES?

Answer 34

-Cafes and coffee shops in large city
-Hotels
-Dry cleaners