3.3.3 Economies + Diseconomies Of Scale Flashcards
What does economies of scale refer to?
- When long run average costs are falling as output increases
- the benefits it receives are called economies of scale
- during this period the firm is enjoying increasing returns to scale
What does diseconomies of scale refer to?
- as firms continue increasing its scale of output in the long run, long run average costs start to increase at some point
- mainly due to management problems - firm gets too big + becomes more difficult to keep control of everything
- during this period the firm is facing decreasing returns of scale
Explain an economies of scale diagram?
- A to B when the firm is benefitting from economies of scale = lowering LRATC
- at point B is the minimum efficiency scale = lowest output at which LRATC are minimised
- C to D the firm is experiencing diseconomies of scale = LRATC rising
- B to C = constant return to scale
What are internal economies of scale?
Result of growth in the scale of production WITHIN A FIRM
Examples of internal economies of scale?
- financial
- technical
- purchasing
- risk bearing
- managerial
Financial economies
- larger firms are more able to obtain cheaper loans than smaller firms as they are considered more creditworthy
- less of a risk
Technical economies
- larger firms are able to afford more advanced machinery
- therefore are more productive due to technology
Purchasing economies
- larger firms tend to buy more in bulk
- this means they pay a cheaper price per unit
Risk bearing economies
- larger firms tend to be able to operate in different markets + sell different products
- this serves to spread risk from just selling one product in one market
Managerial economies
- larger firms tend to be able to employ specialist managers
- whereas in smaller firms the owner tends to be involved in running of all areas of the business
What are external economies of scale?
- affect the industry as a whole —> collection of firms making a similar product
- occurs when there is an increase in the size of an industry in which a firm operates
- the firm is able to benefit from lower LRATC generate by factors outside of the firm
Examples of external economies of scale?
- skilled labour
- good infrastructure
- good area for business
Skilled labour
- an increase in skilled labour can lower the cost of skilled labour
- thereby decreasing the LRATC
- the larger the area of business = larger the pool of skilled labour
Good infrastructure
- improved transport links develop around growing industries
- help get people to work + improve transport of goods
- this lowers LRATC
Good area for business
- as an industry grows, related firms closer to major manufacturers to cut costs + generate more business
- lowers LRATC - e.g. car manufacturers nears factories for car parts
Explain how diseconomies of scale occur
Control - as firms get bigger = harder for managers to have control over all workers = productivity + quality May decline unless workers are self-motivated
Communication - management may find it hard to communicate with employees + coordinate activities - worker may become duplicated causing waste
