3.3.3 - Economies & Diseconomies Of Scale Flashcards
What Is EOS?
(3 Points)
~ A reduction in LRAC as output increases.
~ Advantages of large scale production.
~ Enjoying increasing returns to scale.
What Is Increasing Returns To Scale?
Where an increase in inputs by a certain % will lead to a greater % increase in output.
What Are The 2 Types Of EOS?
~ Internal.
~ External.
What Are Internal EOS?
(8 Points)
~ Within the businesses control, they can exploit them as the business grows.
~ Really -> Fun -> Mums -> Try -> Making -> Pies.
~ Risk bearing.
~ Financial.
~ Managerial.
~ Technical.
~ Marketing.
~ Purchasing.
How Do Internal EOS Cause A Decrease In AC?
Total costs rises in each case, but quantity rises much faster decreasing AC.
Describe ‘Risk Bearing EOS’ As An Internal EOS
(2 Points)
~ Risk is a cost to the business.
~ As the business gets larger they are able to spread their risk over a larger range of output.
Describe ‘Financial EOS’ As An Internal EOS
~ As a business gets larger they can negotiate lower rates of interest when they get a loan from the bank.
~ When firms have a good reputation, the bank perceives them as being lower risk.
~ Banks are more likely to give them a cheaper interest on the loan, decreasing their AC.
Describe ‘Managerial EOS’ As An Internal EOS
(4 Points)
~ As a firm gets larger they can employ specialist managers.
~ These managers monitor the productivity of the workforce, boosting it.
~ They bring in their specialist skills, which workers can then benefit from, increasing productivity.
~ Increasing productivity then decreases AC.
Describe ‘Technical EOS’ As An Internal EOS
(2 Points)
~ Bringing in specialist machinery as a firm gets larger, which boosts productivity and decreases AC as they spread cost of more units of output.
~ Bringing in specialists workers as a firm gets larger, boosting productivity and decreasing AC.
Describe ‘Marketing EOS’ As An Internal EOS
Bulk buying advertising, spreading this cost over a greater number of sales reducing AC.
Describe ‘Purchasing EOS’ As An Internal EOS
(2 Points)
~ When a firm as they grow can buy their raw materials in bulk, negotiating unit discounts.
~ Lowering AC as a result.
What Are External EOS?
(4 Points)
~ Occur within the industry and as a firm gets larger.
~ Better transport infrastructure.
~ Component suppliers move closer.
~ R+D firms move closer.
~ Skilled labour becomes cheaper and moves closer.
How Do External EOS Cause A Decrease In AC?
Total cost decreasing.
Describe ‘Better Transport Infrastructure’ As An External EOS
(2 Points)
~ New infrastructure, which reduces transport costs.
~ Makes it cheaper to sell goods and to access raw materials and components.
Describe ‘Component Suppliers Move Closer’ As An External EOS
(2 Points)
~ Larger the firm incentives them to move closer.
~ Cutting down the costs of transporting raw materials.
Describe ‘R+D Firms Move Closer’ As An External EOS
(2 Points)
~ They see that you are a key business for them, causing them to move closer.
~ Use this R+D to improve technology and reduce costs.
Describe ‘Skilled Labour Moves Closer & Becomes Cheaper’ As An External EOS
(2 Points)
~ Established businesses tend to draw skilled labour towards them.
~ More skilled labour, lowers the cost for skilled labour.
What Is DEOS?
(3 Points)
~ An increase in LRAC as output increases.
~ Disadvantages of large scale production which reduce efficiency.
~ Experience’s decreasing returns to scale.
What Are The Types Of DEOS?
(4 Points)
~ 3Cs and an M.
~ Control.
~ Communication.
~ Coordination.
~ Motivation.
How Do DEOS Cause A Increase In AC?
Impacts productivity as TC rises faster than quality, causing a rise in AC.
Describe ‘Control’ As A DEOS
(2 Points)
~ As a business gets larger, managers find it hard to control the workforce.
~ If workers know this, they will then slack off a bit more, impacting productivity.
Describe ‘Communication’ As A DEOS
(3 Points)
~ As a firm grows it is much harder to spread messages through the company.
~ Opportunity cost of great ideas not being transferred quick enough.
~ This all decreases efficiency and productivity.
Describe ‘Coordination’ As A DEOS
(3 Points)
~ Coordinating different parts of the business becomes more difficult as you get larger.
~ Difficult to work alongside other departments.
~ Causing productivity to suffer.
Describe ‘Motivation’ As A DEOS
(3 Points)
~ As a business gets larger, they are more workers.
~ This means that each individual worker will feel less valued and that they can be easily replaced.
~ Affecting productivity.
