3.3.3 Economies + Diseconomies Of Scale

Question 1

What does economies of scale refer to?

Answer 1

• 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

Question 2

What does diseconomies of scale refer to?

Answer 2

• 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

Question 3

Explain an economies of scale diagram?

Answer 3

• 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

Question 4

What are internal economies of scale?

Answer 4

Result of growth in the scale of production WITHIN A FIRM

Question 5

Examples of internal economies of scale?

Answer 5

• financial
• technical
• purchasing
• risk bearing
• managerial

Question 6

Financial economies

Answer 6

• larger firms are more able to obtain cheaper loans than smaller firms as they are considered more creditworthy
• less of a risk

Question 7

Technical economies

Answer 7

• larger firms are able to afford more advanced machinery
• therefore are more productive due to technology

Question 8

Purchasing economies

Answer 8

• larger firms tend to buy more in bulk
• this means they pay a cheaper price per unit

Question 9

Risk bearing economies

Answer 9

• 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

Question 10

Managerial economies

Answer 10

• 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

Question 11

What are external economies of scale?

Answer 11

• 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

Question 12

Examples of external economies of scale?

Answer 12

• skilled labour
• good infrastructure
• good area for business

Question 13

Skilled labour

Answer 13

• 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

Question 14

Good infrastructure

Answer 14

• improved transport links develop around growing industries
• help get people to work + improve transport of goods
• this lowers LRATC

Question 15

Good area for business

Answer 15

• 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

Question 16

Explain how diseconomies of scale occur

Answer 16

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