3.3.3 Economies and Diseconomies of Scale Flashcards
LS4
1
Q
Constant returns to scale?
A
- When output increases in same proportion as all inputs
2
Q
Increasing returns to scale?
A
- Output increases proportionately more than increase in all inputs
3
Q
Decreasing returns to scale?
A
- Output increases proportionately less than increase in all inputs
4
Q
What does LRAC curve represent?
A
- The lowest possible average cost for every level of output when all resources are variable
5
Q
Economies of scale?
A
- Decreases in the average costs of production over the long run as a firm increases all its inputs
Downwards sloping portion of LRAC curve
6
Q
Types of economies of scale?
REALLY FUN MUMS
A
- Risk-bearing economies of scale
- Financial economies of scale
- Managerial economies of scale
- Technical economies of scale
- Marketing economies of scale
- Purchasing economies of scale
7
Q
Risk-bearing EoS?
A
- Larger firms can diversify into diff products/markets = more predictable overall demand = more able to take risks
8
Q
Financial EoS?
A
- Larger firms able to raise finance on more favourable terms than smaller firms
9
Q
Managerial EoS?
A
- Able to employ specialist managers to take care of diff areas of the business (gain expertise/experience in specific areas of business)
- Management cost per unit falls as number of managers needed doesnt usually depend directly on production scale
BUT at some point, organisation gets so large and complex that management becomes more difficult - diseconomies of scale
10
Q
Technical EoS?
A
- Many activities in which large-scale production is more efficient due to the technology
- Some equipment designed for large-scale production
- Overhead costs more viable
11
Q
Marketing EoS?
A
- Advertising is a fixed cost, spread over more units = cost/unit falls
- Brand awareness = firm doesnt need to advertise as much to get sales
12
Q
Purchasing EoS?
A
- Purchasing inputs in larger volumes, may be able to negotiate deals with suppliers
13
Q
Diseconomies of scale?
A
- Increases in AC of production as a firm increases all its inputs
Upward sloping portion of LRAC curve
14
Q
Reasons for diseconomies of scale?
A
- Coordination and monitoring difficulties (growing inefficiencies)
- Communication difficulties (between various component parts of the firm = inefficiencies)
- Poor worker motivation (less efficient/productive)
15
Q
Minimum efficient scale?
A
- Lowest point on the LRAC
Output range over which a business achieves productive efficiency
16
Q
Internal EoS?
A
- The cost advantages a firm can achieve as a result of its own growth and expansion
i.e. RFMTMP
17
Q
External EoS?
A
- Cost advantages that result from the growth and expansion of an entire industry or cluster of firms in a particular geographic area
e.g. Skilled labour pool (reduced training costs), infrastructure
