3.3.3 Economies and Diseconomies Of Scale Flashcards
What are the 6 key economies of scale?
- Financial Economies
- Managerial Economies
- Marketing Economies
- Purchasing Economies
- Technical Economies
- Risk-bearing Economies
ALL INTERNAL
What are the 4 diseconomies of scale?
- Management diseconomies
- Communication diseconomies
- Geographical diseconomies
- Cultural diseconomies
ALL INTERNAL
What are financial economies of scale?
Large firms get better access to loans with lower interest rates due to their credibility.
Managerial economies of scale?
Bigger firms can afford to hire specialized managers, increasing efficiency.
Marketing economies of scale?
Marketing costs (like ads) are spread over more units, reducing per-unit cost.
Technical economies of scale?
Firms can afford advanced machinery and tech, improving productivity.
Risk-bearing economies of scale?
Larger firms can spread risks across products, markets, or regions.
Purchasing economies of scale?
Large-scale buying allows bulk discounts and better deals from suppliers.
Communication diseconomies of scale?
Harder to communicate across large organizations, leading to misunderstandings or delays.
What is the general trend with economies / diseconomies of scale?
As a firm increases its scale of output in the long-run, its long-run average total costs (LRATC) will initially decrease due to the benefits it receives.
As a firm continues increasing its scale of output in the long-run, its LRATC will start to increase at some point.
Management diseconomies of scale?
Too many layers of management can slow decision-making and reduce efficiency.
Geographical diseconomies of scale?
Operating in multiple or distant locations increases transport and coordination costs.
What is the minimum efficient scale?
The minimum efficient scale is the lowest cost point on a long-run average total cost (LRATC) curve
It represents the lowest possible cost per unit that a firm in the industry can achieve in the long run.
Cultural diseconomies of scale?
Difficulties in maintaining a cohesive corporate culture across a very large firm.
What are constant returns to scale?
Experienced at the minimum efficient scale -> means when an increase in input = proportional increase in output.
What are external economies of scale?
External economies of scale occur when there is an increase in the size of the industry in which the firm operates
What are some examples of external economies of scale?
Improved transport links or an increase in skilled labour.
