3.3.3 Economies and diseconomies of scale & c) Relationship between short-run and long-run average cost curves

Question 1

What is the difference between long run average cost and short run

Answer 1

LRAC - The cost per unit produced when all FOPs are variable
SRAC - The cost per unit where one or more FOP is fixed

Question 2

What is the LRAC determined by

Answer 2

The benefits and drawbacks as a result of increasing the scale of production

Question 3

What are returns to scale ?

Answer 3

• How outputs respond to a change in inputs

Question 4

When does increasing returns to scale occur ?

Answer 4

• When %Δ in outputs > %Δ inputs

Question 5

What does decreasing returns to scale occur ?

Answer 5

• When %Δ in outputs < %Δ in inputs

Question 6

When does constant returns to scale occur ?

Answer 6

• When %Δ in outputs = %Δ in inputs

Question 7

What is economies of scale

Answer 7

• A reduction in LRAC as output increases

Question 8

What are three internal economies of scale and describe each one

Answer 8

• Financial economies : As a company grows in size, banks are more willing to give them loans at lower rate due to financial credibility
• Managerial : Managers salary can be spread across more units of labour to reduce AC
• Purchasing