3.3.3 - economies and diseconomies of scale

Question 1

definition and types of economies and diseconomies of scale

Answer 1

economies of scale is where an increase in output leads to lower long run average costs, occur on LRAC before first quantity where constant returns to scale occur (minimum efficient scale)

diseconomies of scale is where an increase in out leads to higher long run average costs, occur on LRAC after last quantity constant returns to scale occur

types
- technical
- financial
- risk bearing
- managerial
- marketing and purchasing

Question 2

Minimum efficient scale

Answer 2

this is the minimum level of output needed for a business to fully exploit economies of scale, at first quantity where constant returns to scale occur

Question 3

Distinction between internal and external economies of scale

Answer 3

internal economies of scale is an advantage that a firm is able to enjoy because of a growth in the firm, independent of anything else happening to other firms or the industry in general

external economies of scale is an advantage that arises from the the growth of the industry in which the firm operates, this causes the LRAC curve to shift down