3.3.3 Economies and diseconomies of scale

Question 1

what are returns to scale?

Answer 1

how the output of a bus responds to a change in inputs

Question 2

what happens in the lr to do w production?

Answer 2

in the lr, all fop are variable and the scale of producrion can change

Question 3

in the lr buses are looking for output to combine what?

Answer 3

combine labour and capital

Question 4

what process is involved in combining labour and capital?

Answer 4

involves a proc of capital-labour substitution where capital machinery and new tech replaces some of the lab output

Question 5

why do firms want to combine labour and capital?

Answer 5

combine labour and capital in a way that maximises productivity and reduces unit costs towards their lowest level

Question 6

what are eos?

Answer 6

Economies of scale occur when long run average costs fall with increasing output.

Question 7

what are eos the advantages of?

Answer 7

Economies of scale are the advantages of large scale production that enable a large business to produce at a lower average cost than a smaller business.

Question 8

what do firms experience as a result of eos?

Answer 8

As a result, the firm is able to experience increasing returns to scale where an increase in inputs by a certain percentage will lead to a greater percentage increase in output.

Question 9

what are internal eos?

Answer 9

Internal economies of scale occur when an individual firm becomes more efficient, reducing the average total cost of production.

Question 10

what is srac explained by compared to lrac?

Answer 10

-SRAC: Law of Diminishing (Marginal) Returns
-LRAC: economies/diseconomies of scale

Question 11

what do lower lrac costs represent?

Answer 11

These lower costs represent an improvement in productive efficiency and can give a business a competitive
advantage in a market.
* They can lead to lower prices for consumers and higher profits / dividends for shareholders.
* As long as the long run average total cost curve (LRAC) is falling, then internal economies of scale are being
exploited by a business.

Question 12

what do lower lrac/ eos lead to?

Answer 12

They can lead to lower prices for consumers and higher profits / dividends for shareholders.

Question 13

What does it indicate when a business’s long-run average total cost (LRAC) curve is falling?

Answer 13

It indicates that the business is exploiting internal economies of scale.

Question 14

Why does the long-run average total cost (LRAC) curve fall as internal economies of scale are exploited?

Answer 14

Because the cost per unit decreases as the firm increases its scale of production, spreading fixed costs over a larger output.

Question 15

what are the 6 internal eos’s?

Answer 15

1. financial
2. purchasing
3. marketing
4. technical
5. managerial
6. risk bearing

Question 16

alienation

Answer 16

Workers feel alienated in very large firms, like they’re just another cog in the machine. This leads to demotivation, decreasing productivity, increase LRAC.

• eg, call centres in India

Question 17

bureaucracy

Answer 17

Bureaucracy is all the paperwork, managers, filing and secretaries that a firm has to pay for when it expands, increasing LRAC.

Question 18

communication

Answer 18

In big firms, employees may argue with each other and communication will be slow because big firms have so many layers. These factors will reduce productivity, increasing LRAC.

Question 19

consequences of diseconomies of scale

Answer 19

• lead to a rise in a firm’s long run average cost of production.
• They result from a business expanding beyond an optimum size and losing productive efficiency
• Higher long run average costs will reduce the profitability of a business if their prices remain the same

Question 20

What happens when a business moves beyond its optimum size?

Answer 20

It may suffer from productive inefficiency, which can arise due to organisational or managerial slack.

Question 21

How might a business’s size lead to the loss of human capital?

Answer 21

Breakdowns in communication can lead to the departure of highly skilled workers, resulting in a loss of human capital.

Question 22

What impact can low worker morale have on a business that has grown too large?

Answer 22

Low morale can reduce productivity and increase unit costs, which may reduce total profs

Question 23

Why might a business need to raise prices after growing beyond its optimum size?

Answer 23

Higher unit costs from inefficiencies may force the business to raise prices to cover increased costs

Question 24

How can moving beyond optimum size affect a business’s competitiveness?

Answer 24

Lost competitiveness can lead to a declining market share and, if listed, a fall in the share price, potentially making the business vulnerable to takeovers.

Question 25

purchasing eos

Answer 25

bigger firms can bulk buy and negotiate lower prices, reducing their lr av costs. (as its cheaper)