3.3.3 Economics/Diseconomies of Scale

Question 1

Constant returns to scale?

Answer 1

When output increases in same proportion as all inputs

Question 2

Increasing returns to scale?

Answer 2

Output increases proportionately more than increase in all inputs

Question 3

Decreasing returns to scale?

Answer 3

Output increases proportionately less than increase in all inputs

Question 4

What does LRAC curve represent?

Answer 4

The lowest possible average cost for every level of output when all resources are variable

Question 5

Economies of scale?

Answer 5

Decreases in the average costs of production over the long run as a firm increases all its inputs

Downwards sloping portion of LRAC curve

Question 6

Types of economies of scale? (Really Fun Mums Try Making Pies)

Answer 6

Risk-bearing economies of scale
Financial economies of scale
Managerial economies of scale
Technical economies of scale
Marketing economies of scale
Purchasing economies of scale

Question 7

Risk-bearing EoS?

Answer 7

Larger firms can diversify into diff products/markets = more predictable overall demand = more able to take risks

Question 8

Financial EoS?

Answer 8

Larger firms able to raise finance on more favourable terms than smaller firms

Question 9

Managerial EoS?

Answer 9

Able to employ specialist managers to take care of diff areas of the business (gain expertise/experience in specific areas of business)

Management cost per unit falls as number of managers needed doesn’t usually depend directly on production scale

BUT at some point, organisation gets so large and complex that management becomes more difficult - diseconomies of scale

Question 10

Technical EoS?

Answer 10

• Many activities in which large-scale production is more efficient due to the technology
• Some equipment designed for large-scale production
• Overhead costs more viable

Question 11

Marketing EoS?

Answer 11

Advertising is a fixed cost, spread over more units = cost/unit falls

Brand awareness = firm doesn’t need to advertise as much to get sales

Question 12

Purchasing EoS?

Answer 12

Purchasing inputs in larger volumes, may be able to negotiate deals with suppliers

Question 13

Diseconomies of scale?

Answer 13

Increases in AC of production as a firm increases all its inputs

Upward sloping portion of LRAC curve

Question 14

Reasons for diseconomies of scale?

Answer 14

• Coordination and monitoring difficulties (growing inefficiencies)
• Communication difficulties (between various component parts of the firm = inefficiencies)
• Poor worker motivation (less efficient/productive)

Question 15

Minimum efficient scale?

Answer 15

Lowest point on the LRAC

Output range over which a business achieves productive efficiency

Question 16

Internal EoS?

Answer 16

The cost advantages a firm can achieve as a result of its own growth and expansion

i.e. RFMTMP

Question 17

External EoS?

Answer 17

Cost advantages that result from the growth and expansion of an entire industry or cluster of firms in a particular geographic area

e.g. Skilled labour pool (reduced training costs), infrastructure