3.3.3 - Economies and diseconomies of scale

Question 1

a) Types of economies and diseconomies of scale

Managerial economies

Answer 1

• Large companies can afford to appoint specialist managers in every field, who are specialised and so have greater knowledge and are able to do their job better
• Staff represent an Indivisibility and so small firms cannot employ specialist staff

Question 2

a) Types of economies and diseconomies of scale

Purchasing and marketing economies

Answer 2

• Buying in Bulk => Large firms able to buy in large numbers so may be able to buy raw materials for cheaper than competitors
• Specialisation => Businesses can afford to take on specialist buyers and sellers who could be more efficient due to time and knowledge
• Distribution => Able to enjoy preferential rates from transport companies because they offer a lot of business, transport in big batches
• Marketing => Can enjoy lower average costs eg 30s TV commercial costs the same amount to bring in 10m sales as it does for 5m sales

Question 3

a) Types of economies and diseconomies of scale

Financial economies

Answer 3

Large firms have greater security because they have more assets and are therefore less likely to be forced out of business overnight
=> it is easier for them to obtain finance and interest rates will be lower due to lower risk making investment more accessible

Question 4

a) Types of economies and diseconomies of scale

Technical economies

Answer 4

• arise from what happens in the production process
• Specialisation - Large firms will be able to appoint specialist workers and buy specialist machines which will be able to do their jobs more quickly and better than machines/workers which are not specialised
• Balanced Teams of Machines - Large firms can afford to buy a number of every kind of machine for each stage of production. By combining these machines, they can ensure they run each machine at its optimal level. Smaller companies may only be able to afford one machine for each stage and if one stage of production runs faster than the other, machines will spend a long time turned off
• Increased Dimensions - This relates to the fact that if you double the size of the walls you can increase the area by four times, or if you double the size of a container, you increase the amount it can carry by more than double
  This all occurs without doubling the cost
• Indivisibility of Capital - Some processes require huge items of machinery and investment that make it only possible for them to produce on a large scale
  -Research and Development - Often it is only large firms that can afford to carry out large scale R&D, which means they are able to gain a large advantage over their competitors

Question 5

b) Minimum efficient scale

Answer 5

• MES is the scale of output where internal economies of scale have been fully exploited
• the optimal lvl of production - productive efficiency as producing at the lowest cost

Question 6

c) Distinction between internal and external economies of scale

Answer 6

• internal economies of scale arise because of the growth in output of the firm. External economies of scale arise when there is a growth in the size of the industry in which the firm operates
• eg better road network = lower costs to individual firms or lower training cost because workers are being trained by other firms and are then poached
• EEoS - shifts LRAS downwards - at any given output, cost will be lower as industry has grown as a whole