3.3.3 - Economies and diseconomies of scale

Question 1

What are inputs like in the long run ?

Answer 1

They are all variable

Question 2

What is the shape of the LRAC curve ?

Answer 2

U shape

Question 3

Why is the LRAC curve in a U shape ?

Answer 3

The U shape of the LRAC curve can be found in economies and diseconomies of scale, in turn related to increasing and decreasing returns to scale.

Question 4

What is the first part of the LRAC curve like ?

Answer 4

First part of the curve there are increasing returns to scale (economies of scale)

Question 5

What is the middle part of the LRAC curve like ?

Answer 5

Second part of the curve there are constant returns to scale

Question 6

What is the final part of the LRAC curve like ?

Answer 6

Third part of the curve there are decreasing returns to scale (diseconomies of scale)

Question 7

What are economies of scale?

Answer 7

Economies of scale are decreases in the average costs of production over the long run as a firm increases all its inputs.

Question 8

What part of the LRAC curve does economies of scale explain ?

Answer 8

Economies of scale explain the downward-sloping portion of the LRAC curve

As output increases, and a firm increases all inputs, average cost, or cost per unit of output, falls.

Question 9

What are the different types of economies of scale ?

Answer 9

Technical
Managerial
Marketing
Financial
Purchasing
Risk bearing
Diseconomies

Question 10

What do technical economies of scale refer to ?

Answer 10

It refers to cheaper spending on technology, indivisibilites and overhead costs

Question 11

What do managerial economies of scale refer to ?

Answer 11

The employment of specialist managers to take care of different areas of the business

Question 12

What is an advantage of employing different specialist managers ?

Answer 12

These specialist managers gain expertise and experience in a specific area of the business, which usually leads to better decision-making abilities in that area.

Question 13

When are diseconomies of scale likely to cut in for managers ?

Answer 13

At some point, the organisation begins to get so large and complex that management finds it more difficult to manage.

At this point diseconomies of scale are likely to cut in.

Question 14

What do marketing economies of scale refer to ?

Answer 14

Advertising

Question 15

How does cost of advertising change as a firm gets bigger ?

Answer 15

Advertising is spread over more units for large firms, so the cost per unit is lower as a firm increases its scale of production.

Question 16

What can high brand awareness mean for a firm ?

Answer 16

They will not have to advertise as much to get sales as people already know them

Question 17

What do financial economies of scale refer to ?

Answer 17

Large firms may be able to raise finance for further expansion on more favourable terms than a small firm.

Question 18

What does a large firm being able to finance expansion do for the market ?

Answer 18

It reinforces the market position of the largest firms in a sector and makes it more difficult for relative newcomers to become established.

Question 19

What do purchasing economies of scale refer to ?

Answer 19

Once a firm has grown to the point where it is operating on a relatively large scale, it will also be purchasing its inputs in relatively large volumes

Question 20

How can buying in bulk be beneficial for a larger firm ?

Answer 20

When buying in bulk in this way, firms may be able to negotiate good deals with their suppliers, and thus again reduce average cost as output increases.

Question 21

What are diseconomies of scale ?

Answer 21

Diseconomies of scale are increases in the average costs of production as a firm increases its output by increasing all its inputs.

Question 22

What part of the LRAC curve are diseconomies of scale responsible for ?

Answer 22

Diseconomies of scale are responsible for the upward sloping part of the LRAC curve

As a firm increases its scale of production, costs per unit of output increase.

Question 23

What are some of the reasons for diseconomies of scale ?

Answer 23

Co ordination and monitoring difficulties
Communication difficulties
Poor worker motivation

Question 24

What can coordination and monitoring difficulties lead to ?

Answer 24

The result involves growing inefficiencies causing average costs to increase as the firm expands.

Question 25

What can communication difficulties lead to ?

Answer 25

A larger firm size may lead to difficulties in communication between various component parts of the firm, again resulting in inefficiencies and higher average costs.

Question 26

What can poor worker motivation lead to ?

Answer 26

If workers begin to lose their motivation and care less about their work, they become less efficient, this results in costs per unit of output starting to increase.