3.3.3 - economies and diseconomies of scale Flashcards
What are economies of scale?
As output increases due to growth of a firm, LRAC falls. The firm is able to experience increasing returns to scale
What are diseconomies of scale?
The disadvantages experienced by firms as they grow, reducing efficiency and increasing LRAC. They experience decreasing returns to scale
What are technical economies of scale?
The use of better machinery and technology increases efficiency of the production process, reducing unit costs for large firms. The more the equipment is used, the lower the unit costs of production.
What are some examples of technical economies of scale?
- specialisation = large firms can obtain specialist workers and machines that increase productivity and efficiency by working more quickly, reducing unit costs
- increased dimensions = if the area of the firm is doubled, the amount it can produce more than doubles
- indivisibility of capital = processes that require huge amounts of machinery can only be achieved in large firms
What are financial economies of scale?
Bigger firms can lower costs as they have access to better quality capital markets eg. they can secure loans at lower interest rates. Investment becomes more accessible and cheaper for them
What are managerial economies of scale?
Larger firms spread management and admin costs over a larger output, reducing average costs. Managers may also be more specialised and efficient, as larger firms can afford to employ higher levels of staff.
What are purchasing/marketing economies of scale?
Larger firms can purchase FOPs in bulk, securing lower prices, reducing average costs and distribution expenses
What are some examples of purchasing/marketing economies of scale?
- buying in bulk = FOPs are bought at a lower prices, reducing AC
- specialisation = firms can afford specialist buyer and sellers, increasing efficiency and reducing average costs
- distribution = larger firms may experience lower rates from transport firms, due to large batches. They can also establish regional distribution centres reducing their transport costs in the long run
What are internal economies of scale?
Cost advantages experienced by a firm due to expanding production/operations via organic growth
- technical economies
- managerial economies
- financial economies
- purchasing/marketing economies
What are external economies of scale?
Cost adavantages experienced by a firm resulting from growth of an industry or a cluster of firms in a geographical region. They benefit all firms in the industry.
What are some examples of external economies of scale?
- skilled labour pool = if multiple large firms in the same industry cluster in the same region, a skilled labour force will develop in the area. Firms can benefit from this as search costs, training costs and labour shortages are all reduced
- support services = firms that provide services/products for other large firms will move to the area where the businesses are based, reducing transport costs and delays for firms
What is the minimum efficient scale?
The output level where the lowest cost of production begins, constant returns to scale also begin here.
How can workers cause diseconomies of scale?
In a large business, people may think their efforts go unnoticed and they believe they have less chance of promotion so they lose motivation and work less hard. They may lose their sense of belonging so are less committed to the business.
How can geography cause diseconomies of scale for a firm?
A firm may have to transport finished products over huge distances. It may be difficult to control parts of the firm that are located far away.
How can prices of materials cause diseconomies of scale?
As a firm grows, demand for raw materials and FOPs grows. This increase in demand may cause increased prices leading to higher production costs.
How can management issues cause diseconomies of scale?
- Coordination and control = as a firm grows, it becomes more difficult to control the different parts of the business. This may lead to poorer quality of work and business decisions that are ineffective.
- Communication = within larger firms, communication may be slow and less accurate due to distances and large amounts of people info is passed through.
