3.3.3: Economies & Diseconomies Of Scale Flashcards
What are economies of scale?
Where long run average costs fall.
What are diseconomies of scale?
Where long run average costs rise.
What is the minimum efficient scale?
The minimum output level required for a business to exploit economies of scale.
What are increasing returns to scale (economies of scale)?
When an increase in input leads to a greater % increase in output.
What are constant returns to scale?
An increase in input leads to the same % increase in output.
What are decreasing economies of scale (diseconomies of scale)?
When an increase in input leads to a lower % increase in output.
LRAC graph:
What do internal economies of scale refer to?
When a firm gets larger.
What is the acronym for internal economies of scale?
Really.
Fun.
Mums.
Try.
Making.
Pies.
What are the internal economies of scale (Really Fun Mums Try Making Pies)?
Risk-taking.
Financial.
Managerial.
Technological.
Marketing.
Purchasing.
What is risk-taking economies of scale (internal economies of scale)?
Large firms can expand their production range to spread the cost of uncertainty (if one part is unsuccessful, they have other parts as fallback).
What is financial economies of scale (internal economies of scale)?
Large firms take cheaper interest rates/credit as banks tend to low to low-risk (large) firms.
What is managerial economies of scale (internal economies of scale)?
Large firms employ specialist managers to specialise and divide labour.
What is technological economies of scale (internal economies of scale)?
Large firms may invest in more productive capital to decrease average costs.
What is marketing economies of scale (internal economies of scale)?
Large firms lowering the unit cost of promotion & advertising (e.g. ease of access to media markets).
What is purchasing economies of scale (internal economies of scale)?
Large firms can bulk-buy to decrease unit costs.
What do external economies of scale refer to?
When an industry gets larger.
What are the external economies of scale?
Labour.
Transport.
What is labour (external economies of scale)?
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.
What is transport (external economies of scale)?
Improvement of roads reduces transportation costs.
What are examples of diseconomies of scale?
Control.
Co-ordination.
Communication.
What is control (diseconomies of scale)?
Large firms find it harder to monitor productivity.
What is co-ordination (diseconomies of scale)?
Large firms find it complex to co-ordinate the workforce.
What is communication (diseconomies of scale)?
Workers may feel alienated as a firm grows, leading to a fall in productivity (as they feel less motivation and personal commitment).
Normal Industry MES Graph vs Natural Monopoly MES Graph:
Why do natural monopolies have a low LRAC and a large MES compared to normal industries?
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.
Natural Monopoly:
-… fixed costs.
-… variable costs.
-High fixed costs (high barriers to entry).
-Low variable costs (little competition for factors of production).
Normal Industry:
-… fixed costs.
-… variable costs.
-Low fixed costs (low barriers to entry).
-High variable costs (high investment of factors of production).
Example of a natural monopoly:
Railway industry.
Examples of normal industries:
-Supermarket industry.
-Restaurant industry.
