3.3.3 Flashcards
In the long run all factors of production are what?
Variable
What is returns to scale?
How the output of a business responds to a change in inputs
In the long run businesses look for an output that combines what?
Labour and capital to maximise productivity and recues unit costs towards their lowest level
What is capital-labour substitution?
Capital machinery and new technology replaces labour input
What is economies of scale?
The unit cost advantages from expanding the scale of production in the long run.
Economies of scales exist when?
Long run average costs fall as output rises.
What do lower costs represent?
Improvement in productive efficiency and gives a business a competitive advantage
If the long run average total cost curve is declining then what is being expolited?
Internal economies of scale are being exploited by a business.
What are technical economies of scale?
-Expansive capital inputs
-Specialisation of the workforce
-Law of increased dimensions
-Learning by doing
What is expansive capital inputs as a technical economies of scale?
Large-scale businesses can afford to invest in specialist capital machinery
What is specialisation of the workforce as a technical economies of scale?
Larger firms can split the production processes into separate tasks to boost productivity
What is law of increased dimensions as a technical economies of scale?
Doubling the height and width of a tanker or building leads to a more proportionate increase in cubic capacity
What is learning by doing as a technical economies of scale?
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.
What is purchasing economies?
A large firm can purchase factor inputs at bulk in lower prices if it has monopsony power
What is managerial economies of scale?
Division of labour where firms employ specialists to supervise production systems
What are financial economies of scale?
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)
What is network economies of scale?
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.
When do external economies of scale occur?
When a whole industry benefit from lower long-run average costs
What is the cluster effect as a factor of external economies of labour?
If firms locate to a similar area, this makes it more efficient for suppliers to meet a larger base of purchasers
What is skilled labour as a factor of external economies of labour?
If similar firms locate to a certain region it will encourage skilled labour to seek work in this area.
What are factors of external economies of scale?
-Cluster effect
-Skilled labour
-Transport links
-Supportive legislation
What are diseconomies of scale?
Increases in the unit cost of supply in the long run due to decreasing returns to scale
Diseconomies of scale mean what?
-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
What are the causes of diseconomies of scale?
-Control and communication problems
-Co-operation problems
-Negative effects of internal corporate poltics
How does control and communication problems cause diseconomies of scale?
Problems in monitoring productivity and work quality, risking increasing wastage of resources which adds to costs but not total output
How does co-operation problems cause diseconomies of scale?
Workers in large firms may develop a sense of alienation and loss of morale.
What are consequences of diseconomies of scale?
-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
What is the minimum efficient scale (MES)?
The scale of production where all of the internal economies of scale have been fully exploited
What does the minimum efficient scaled correspond to?
The lowest level of output at which the lowest point on a firm’s long run average cost curve is reached.
In a natural monopoly the minimum efficient scale (MES) is likely to be what?
High
MES is likely to be low relative to what?
The size of market demand in a very competitive industry
What are the 3 causes for why a business will have high minimum efficient scale (MES)
-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
What are examples of markets with a high MES?
-Water, gas and electricity supply
-Underground transport systems
-Social networks and search engines
What are example of markets with a low MES?
-Cafes and coffee shops in large city
-Hotels
-Dry cleaners
