3.3.3 Economies and Diseconomies Flashcards
What is long-run production
All factors of production are variable
How the output of a business responds to a change in inputs is called
returns to scale
Increase returns to scale occur when
The % change in output is bigger than % change in inputs
It impacts on average costs
Its called economies of scale
Decreasing return to scale occur when
The % change in output is smaller than the % change in inputs
It is an impact on average cost
Called Diseconomies of scale
The nature of the return to scale affect
The shape of a business’s long-run average costs curve
How will businesses deal with labour and capital in the long run
For a level of output that combines labour and capital in a way that maximises productivity and reduces unit cost
May involve a process off capital-labour substitution where capital machinery and new technology replaces some of the labour input
How would you show a long run average cost curve
- All factors of production are variable and hence scale of production
- Economies of scale exits when long-run average costs fall as output rises
- Lower costs represent an improvement in productive efficiency
- As long as the long run average total cost curve is declining, then international economies of scale are being exploited
When the long-run average cost curve starts rising, what is happening?
diseconomies of scale
Why would you get confused between short-run average costs curve and long-run average costs curve
Because they are the same shapes
SRAC - explains the law of diminishing returns
LRAC is explained by economies/diseconomies of scale
What are the four types of Technical economies of scale
- Expensive (indivisible) capital inputs
- Specialisation of the workforce
- Law of increased dimensions
- Learn by doing
What are the 6 overall types of economies of scale
- Technical
- Marketing economies
- Managerial economies
- Financial economies
- Network economies of scale
- External economies of scale (EEoS)
Explain:
Expensive (indivisible) capital inputs
As a type of Technical economies of scale
Large-scale businesses can afford to invest in specialist capital machinery
Which smaller independent stores may not be able to justify this initial cost
Explain:
Specialisation of the workforce
As a type of Technical economies of scale
Division of labour - split production process into separate tasks to boots productivity
Explain:
Law of increasing dimensions
As a type of Technical economies of scale
Known as the container principle
Explains that in cubic law, doubling the height and width of a tanker or building leads to a more than proportionate increase in cubic capacity
Links to economies of scale in distribution and freight industries
Explain:
Learn by doing
As a type of Technical economies of scale
Average costs of production decline in real terms as a result of production experience as businesses cut waste and find the most productive means of producing output on a bigger scale
Explain what marketing economies are
In large firms, fixed costs such as advertising campaigns have a small effect on the cost per unit
Large firms can purchase in bulk at a lower price if it has monopsony power - called purchasing economies
What are Managerial economies of scale
A type of division of labour where firms employ specialists to supervise production systems
Better management and increased investment of human resources + specialist equipment, can raise productivity and decrease unit costs
What are financial economies of scale
Larger firms can be deemed more creditworthy, having access to more favourable rates when borrowing
Small firms on the other hand, often pay high interest rates on overdrafts and loans.
(Businesses quoted on the stock market can normally raise new financial capital more cheaply through sales of equities to the capital market)
What are network economies of scale
Some networks and services can benefit hugely from economies of scale, due to the marginal cost of adding one more user to a network is close to zero, but the financial benefit may be huge because each new user to the network can trade with existing members of part of the network#
There are high fixed costs of establishing a network, so the more users the lower the fixed costs per unit are
What are external economies of scale
involve changes outside of the business
i.e. they result from the expansion of the entire industry of which the business is a member
They lower unit costs for many, shifting the long-run average curve downwards
Examples of external economies of scale
- University research departments helping to fund research
- Transport Networks lower logistics costs
- relocation of suppliers to the centre of production
- Influx of human capital - highly skilled workers
What are diseconomies of scale
are increases in unit costs (average) cost of supply in the long run due to decreasing returns to scale
What do diseconomies of scale mean for a business
- A business has moved beyond their optimum size
- Businesses are suffering from productive inefficiency because of organisational slack
- Breakdown in communication may lead to departure of highly skilled workers from the business
- Worker morale can suffer which reduces productivity and increases unit cost - reduces total profit and business may have to raise prices
- Lostcompeitivness could lead to a declining market share and fall in share price on stock market
What can cause diseconomies of scale
- Control + communication problems - struggle to monitor productivity + work quality, risking increasing wastage of resources, adding to total costs
- Co-operation problems - worker may develop a sense of alienation and loss of morale
- Negative effects of internal corporate politics, information overload for employees, unrealistic expectations among managers and cultural clashes between management
