3.3.3 - ECONOMIES & DISECONOMIES OF SCALE Flashcards
What are economies of scale?
As the size and scale of a firm is increased, this is accompanied by falling average costs.
It is a reduction in LRAC as output increases.
Shows by the downwards sloping part of the LRAC curve.
How is the LRAC curve formed?
It is an envelope of a firms SRAC curve, as the experience diminishing marginal returns and need to increase in size and scale.
What are internal economies of scale?
This is when the firms LRAC’s fall due to a growth in the firm itself, independent to anything happening to other firms or the industry the firm is operating in.
Managerial
As firms increase in size and scale, they employ specialist staff to oversee different operations.
Purchasing
Larger firms can purchase supplies at lower costs due to bulk orders.
Technical
Larger firms with more money have the ability to invest more and increase efficiency.
Risk-bearing
Larger firms are able to operate in different markets, and produce in different areas, so if one area fails, then failure has less affect.
Financial
Larger firms find it easier and cheaper to borrow money as they are seen as low-risk.
Marketing
A large firm can spread its advertising and marketing budget over a large output and it can purchase its inputs in bulk
What are external economies of scale?
This is when LRAC falls as firm expand in size or scale due to growth within the industry the firm operates in.
What are diseconomies of scale ?
This is when an increase in the size or scale of a firm leads to an increase in LRAC’s.
Shown by the upwards sloping part of the LRAC curve
How does communication lead to diseconomies of scale?
As firms increase in size and scale, they face communication issues. It is more difficult to pass messages and orders to employees which causes a decrease in productivity and efficiency.
How do control issues lead to diseconomies of scale?
As firms expand in size or scale, there is more labour employed, and larger groups are more difficult to control and monitor by managers, which can cause employees to become lazy, less productive and less efficient.
How do motivation issues lead to diseconomies of scale?
When the firm grows in size and scale, more employees will be employed and workers may feel less valued, and they may feel there are less opportunities for progress and promotion leading to a fall in production and efficiency, due to a lack in motivation.
Furthermore when businesses grow, this can cause specialisation and workers may feel less motivated due to repetitive works, leading to a fall in production and efficiency.
