3.3.3 - Economies & Diseconomies Of Scale

Question 1

What Is Economies Of Scale (EOS)?
(2 Points)

Answer 1

~ The advantages of large scale production that enable a large business to produce at a lower AC than a smaller business.

~ A reduction in LRAC as output in the long run increases.

Question 2

What Does A Business Experience During EOS?

Answer 2

Increasing returns to scale.

Question 3

What Is Increasing Returns To Scale?

Answer 3

An increase in inputs by a certain % will lead to a greater % increase in output.

Question 4

What Is Diseconomies Of Scale (DEOS)?
(2 Points)

Answer 4

~ The disadvantages that arise in large businesses that reduce efficiency and cause AC to rise.

~ An increase in LRAC as output increases.

Question 5

What Does A Firm Experience During DEOS?

Answer 5

Decreasing returns to scale.

Question 6

What Is Decreasing Returns To Scale?

Answer 6

When output increases by a smaller % than inputs.

Question 7

What Is Constant Returns To Scale?

Answer 7

Where firms increase inputs and receive an increase in output by the same %.

Question 8

What Are All The Internal EOS?
(6 Points)

Answer 8

~ Risk bearing.

~ Financial.

~ Managerial.

~ Technical.

~ Marketing.

~ Purchasing.

Question 9

Describe Risk Bearing EOS
(2 Points)

Answer 9

~ Spreading the risk of failure by increasing its numbers of production.

~ If one area of the business fails, their whole business will not collapse.

Question 10

Describe Financial EOS
(4 Points)

Answer 10

~ Large firms often receive lower interest rates on loans than smaller firms as they are perceived as less risky.

~ Easier for them to obtain finance.

~ A cheaper loan lowers the AC.

~ Investment is more accessible.

Question 11

Describe Managerial EOS
(3 Points)

Answer 11

~ Occurs when large firms can employ specialist managers in every field who are more efficient at certain tasks.

~ This efficiency lowers the AC.

~ Managers in small firms often have to fulfil multiple roles and are less specialised.

Question 12

Describe Technical EOS
(2 Points)

Answer 12

~ Occur when a firm is able to use its machinery at a higher level of capacity due to the increased output.

~ Spreads the cost of the machinery over more units, lowering the AC.

Question 13

Describe Marketing EOS
(2 Points)

Answer 13

~ Large firms spread the cost of advertising over a large number of sales, reducing the AC.

~ They can also reuse marketing materials in different geographical regions, further lowering the AC.

Question 14

Describe Purchasing EOS
(3 Points)

Answer 14

~ Occurs when large firms buy raw materials in greater volumes and receive a bulk purchase discount, lowering the AC.

~ Large firms are also able to enjoy reduced rates from transport companies because they offer the company a lot of business.

~ Large firms also establish regional distribution centres, reducing transport costs and AC.

Question 15

What Are Internal EOS?

Answer 15

Occur as a result of the growth in the scale of production within the firm.

Question 16

What Are External EOS?

Answer 16

Occur when there is an increase in the size of the industry a firm is in.

Question 17

What Are All The External EOS?
(3 Points)

Answer 17

~ Component suppliers and R&D firms move closer.

~ Better transport infrastructure and transport links.

~ Decrease in the cost for skilled labour.

Question 18

Describe Component Suppliers & R&D Firms Move Closer
(2 Points)

Answer 18

~ Reduces transport costs and time delays for the business.

~ Generates more business and lowers LRAC.

Question 19

Describe Better Transport Infrastructure & Transport Links
(3 Points)

Answer 19

~ Helps efficiency as employees can get to work quicker.

~ Suppliers are able to deliver quicker.

~ Lowers the LRAC.

Question 20

Describe Decrease In The Cost For Skilled Labour
(3 Points)

Answer 20

~ Firms established in an area with other successful firms from the same industry find that labour tends to come to that area, reducing the cost and time taken to recruit.

~ An Increase in skilled labour can lower the cost of skilled labour, decreasing LRAC.

~ Local education and training providers are likely to develop courses to prepare people to take jobs in these large firms.

Question 21

What Are All The Types Of Diseconomies Of Scale?
(4 Points)

Answer 21

~ Coordination and control.

~ Communication.

~ Motivation.

~ Price of materials.

Question 22

Describe Coordination & Control DEOS
(2 Points)

Answer 22

~ As a business grows it becomes more difficult to coordinate and keep control of all the different parts of the business.

~ Leads to poorer quality to work in and poor business decisions.

Question 23

Describe Communication DEOS
(2 Points)

Answer 23

~ In large businesses communication can be slow and can lose accuracy due to the distance and the number of people it has to be passed through.

~ Increases AC.

Question 24

Describe Motivation DEOS
(2 Points)

Answer 24

~ Workers can think their efforts go unnoticed and have less chance of promotion, decreasing work rate.

~ They can also loose their sense of belonging and value to the business as the firm gets larger.

Question 25

Describe Price Of Materials DEOS

Answer 25

Demand for raw materials and equipment grows as the business does, causing a price rise increasing production costs.

Question 26

What Is The Minimum Efficient Scale (MES)?
(2 Points)

Answer 26

~ The minimum level of output needed for a business to fully exploit EOS and to maximise their efficiency.

~ The lowest possible cost per unit that a firm in the industry can achieve in the LR.

Question 27

Where Is The MES Located?

Answer 27

The point where the LRAC curve first levels off and when constant returns to scale is first met.

Question 28

What Rises Faster In Internal EOS TR Or Q?

Answer 28

Quantity, decreasing AC.

Question 29

How Do External EOS Cause AC To Fall?

Answer 29

Because they reduce TC.

Question 30

What Causes Quantity To Suffer For DEOS & Why Does AC Rise?

Answer 30

~ Impacts on productivity.

~ Because TC rise.