3.3.3 - Economies and diseconomies of scale

Question 1

What is economies of scale?

Answer 1

benefits of being big

Question 2

What is the MES?

Answer 2

Minimum Efficiency Scale

Question 3

Benefits of economies of scale

Answer 3

• larger firms will experience significant cost advantages
• firm is able to exploit increased size and lower LRAC
• By decreasing LRAC and approaching minimum point on the LRAC curve, they’re moving toward productive efficiency
• firms can achieve greater supernormal profits

Question 4

Benefits of diseconomies of scale

Answer 4

• large firms become more difficult to manage
• problems organising and coordinating firms activities
• slow decision making + poor communication
• mainly from managerial side, resulting in firm splitting into separate divisions or damaging

Question 5

Three C’s for disceconomies of scale

Answer 5

Control - bigger companies are harder to control
Co-ordination - all work efficiently to do same goal
Communication - more places to share information

Question 6

The law of disminishing returns

Answer 6

increasing variable to a fixed one, at first increases output, but then decreases output. Average marginal costs fall, then rise

Question 7

Marginal costs and average costs

Answer 7

Marginal costs (MC) always cut Average Costs (AC) at its lowest point
- if MC < AC, AC decreases
- if MC > AC, AC increases
- even if MC increases, if it’s below Average Cost then AC decreases
- MC does not change if FC changes