3.3.3: Economies & Diseconomies Of Scale

Question 1

What are economies of scale?

Answer 1

Where long run average costs fall.

Question 2

What are diseconomies of scale?

Answer 2

Where long run average costs rise.

Question 3

What is the minimum efficient scale?

Answer 3

The minimum output level required for a business to exploit economies of scale.

Question 4

What are increasing returns to scale (economies of scale)?

Answer 4

When an increase in input leads to a greater % increase in output.

Question 5

What are constant returns to scale?

Answer 5

An increase in input leads to the same % increase in output.

Question 6

What are decreasing economies of scale (diseconomies of scale)?

Answer 6

When an increase in input leads to a lower % increase in output.

Question 7

LRAC graph:

Answer 7

Question 8

What do internal economies of scale refer to?

Answer 8

When a firm gets larger.

Question 9

What is the acronym for internal economies of scale?

Answer 9

Really.
Fun.
Mums.
Try.
Making.
Pies.

Question 10

What are the internal economies of scale (Really Fun Mums Try Making Pies)?

Answer 10

Risk-taking.
Financial.
Managerial.
Technological.
Marketing.
Purchasing.

Question 11

What is risk-taking economies of scale (internal economies of scale)?

Answer 11

Large firms can expand their production range to spread the cost of uncertainty (if one part is unsuccessful, they have other parts as fallback).

Question 12

What is financial economies of scale (internal economies of scale)?

Answer 12

Large firms take cheaper interest rates/credit as banks tend to low to low-risk (large) firms.

Question 13

What is managerial economies of scale (internal economies of scale)?

Answer 13

Large firms employ specialist managers to specialise and divide labour.

Question 14

What is technological economies of scale (internal economies of scale)?

Answer 14

Large firms may invest in more productive capital to decrease average costs.

Question 15

What is marketing economies of scale (internal economies of scale)?

Answer 15

Large firms lowering the unit cost of promotion & advertising (e.g. ease of access to media markets).

Question 16

What is purchasing economies of scale (internal economies of scale)?

Answer 16

Large firms can bulk-buy to decrease unit costs.

Question 17

What do external economies of scale refer to?

Answer 17

When an industry gets larger.

Question 18

What are the external economies of scale?

Answer 18

Labour.
Transport.

Question 19

What is labour (external economies of scale)?

Answer 19

Labour comes to areas where there are successful firms in the same industry (e.g. Silicon Valley). This reduces the cost and time to recruit.

Question 20

What is transport (external economies of scale)?

Answer 20

Improvement of roads reduces transportation costs.

Question 21

What are examples of diseconomies of scale?

Answer 21

Control.
Co-ordination.
Communication.

Question 22

What is control (diseconomies of scale)?

Answer 22

Large firms find it harder to monitor productivity.

Question 23

What is co-ordination (diseconomies of scale)?

Answer 23

Large firms find it complex to co-ordinate the workforce.

Question 24

What is communication (diseconomies of scale)?

Answer 24

Workers may feel alienated as a firm grows, leading to a fall in productivity (as they feel less motivation and personal commitment).

Question 25

Normal Industry MES Graph vs Natural Monopoly MES Graph:

Answer 25

Question 26

Why do natural monopolies have a low LRAC and a large MES compared to normal industries?

Answer 26

For natural monopolies, demand & competition for factors of production are lower than for normal industries, resulting in low variable costs (despite high fixed costs).

It takes a significant level of output for a natural monopoly to minimise their average costs.

Question 27

Natural Monopoly:
-… fixed costs.
-… variable costs.

Answer 27

-High fixed costs (high barriers to entry).
-Low variable costs (little competition for factors of production).

Question 28

Normal Industry:
-… fixed costs.
-… variable costs.

Answer 28

-Low fixed costs (low barriers to entry).
-High variable costs (high investment of factors of production).

Question 29

Example of a natural monopoly:

Answer 29

Railway industry.

Question 30

Examples of normal industries:

Answer 30

-Supermarket industry.
-Restaurant industry.