3.3.3 Economies And Diseconomies Of Scale

Question 1

Economies of scale

Answer 1

As a firm increases its scale of output in the long run, its LATC will initially decrease due to the benefits it receives (increasing returns to scale)

Question 2

Diseconomies of scale

Answer 2

As a firm continue increasing its scale of output in the long run, its LATC will start to increase at some point (decreasing return to scale)

Question 3

Types of economies of scale

Answer 3

• Financial economies
• Technical economies
• Managerial economies
• Marketing economies
• Purchasing economies
• Risk-bearing economies

Question 4

Financial economies

Answer 4

Larger firms often receive lower interest rates no loans than smaller firms as they are perceived as less risky
- cheaper loans = decreased AC

Question 5

Technical economies

Answer 5

Large scale production, the firm can use its machinery at a higher level capacity due to increased output thereby spreading the cost of the machinery = decreased AC

Question 6

Managerial economies

Answer 6

Large firms can employ specialist managers who are more efficient = decreasedAC. Smaller firm managers have to fulfil multiple roles (and so might be less specialised)

Question 7

Marketing economies

Answer 7

Large firms spread the cost of ads over a large number of sales = decreased AC. They can also reuse marketing materials in different geographic regions = decreased AC

Question 8

Purchasing economies

Answer 8

When large firms buy raw materials in greater volumes & receive bulk purchase discounts = decreased AC

Question 9

Risk-bearing economies

Answer 9

When a firm is able to spread the risk of failure by increasing its numbers of product (ie greater product diversification = less failure = decreased AC)

Question 10

Types of diseconomies

Answer 10

• management diseconomies
• communication diseconomies
• geographical diseconomies
• cultural diseconomies
• relationship with workers

Question 11

Management diseconomies

Answer 11

(Principal-agent problem) when mangers work more in their self-interest than in the interest of the firm (e.g decreased efficiency = increased AC)

Question 12

Communication diseconomies

Answer 12

When a firm with multiple layers of management and multiple location = slow communication, difficult to co-ordinate complicated production processes = decreased efficiency = increased AD

Question 13

Geographical diseconomies

Answer 13

A firm has widespread bases of operations = logistical & communication challenges = increased AC

Question 14

Cultural diseconomies

Answer 14

A firm expands into a foreign market in which workers have different cultural work/productivity norms = increased AC

Question 15

Relationship with workers

Answer 15

A sense of alienation (Karl Marx) and loss of morale/productivity = increased risk of strikes and poor industrial relations = increased AC

Question 16

Karl Marx on specialisation

Answer 16

Karl Marx a german philosopher, economist and political theorist.

increasing the specialisation may also lead to workers with poorer overall skills and a lack of enthusiasm for their work.

Question 17

Natural monopoly

Answer 17

The minimum efficient scale is relatively close to the demand curve (easier for firms to enter and exit)

Question 18

Minimum efficient scale for natural monopoly graph

Question 19

Minimum efficient scale graph

Answer 19

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Question 20

Minimum efficient scale

Answer 20

• the point on a cost curve when a company can produce its product cheaply enough to offer it a competitive price (lowest output level at which LRAC is minimised
• all economies of scale have been fully exploited
• only achieve constant returns to scale

Question 21

Internal economies of scale

Answer 21

Occur as a result of the growth in the scale of production (happens within the firms to change output) within the firm

Question 22

External economies of scale

Answer 22

Arise from a change in the whole industry (e.g a change in the size of an industry, concentration of an industry in a particular geographical area)

In addition to lower production and operating costs, external economies of scale may also reduce a company’s variable costs per unit because of operational efficiencies and synergies.

Question 23

Agglomeration effect

Answer 23

the phenomenon where businesses tend to cluster close to each other and high population areas.

Question 24

External economies of scale example

Answer 24

• local roads might be improved, so transport costs for local industries decreases
• more training facilities or more research and development, which will also lower average costs for firms in the local area.

Question 25

External economies of scale graph

Question 26

Why does the MES vary by industry?

Answer 26

• some industries, fixed costs are high & marginal costs are low = increasing scale of product low AC
• some industries are natural monopolies where LRAC falls over a large range of output

Question 27

What is the significance of the MES?

Answer 27

• size of MES relative to the market (how many firms than an industry can support)
• Low MES = more firms can reach it (monopolistic competition)
• medium MES = highly concentrated market
• high MES = only a single firms can fully explint internal economies of scale (natural monopoly)

Question 28

Evaluation of MES

Answer 28

• can change with tech advances (e.g digital platforms)
• MES is unlikely to be a single output but insted a range of output
• depends on how you define the market (e.g global, regional, national, local- taxi)