3.4.5 - Economies and Diseconomies of Scale Flashcards

Question

How do technical economies of scale lead to reduced overall average costs?

Answer 1

Employing more people, allows those people to specialise, increasing productivity. While the total cost increases, the supply increases faster than the total cost, so the average costs fall. If more capital goods are employed, their initial cost will be quite high, but in the long-run, the productivity gained from more capital goods causes supply to rise faster than costs, causing average costs to fall. The land they have employed can be used more efficiently as a firm gets larger, so the plant becomes more efficient, leading to a greater supply rise than costs, therefore average costs fall. AC = TC / Q

Answer 2

As a firm increases in scale, the firm is, therefore, able to benefit from specialisation and division of labour, namely, the employment of specialist managers. These managers will be able to monitor the productivity of their particular labour force, boosting productivity if needs be. The managers will also be able to apply their specialist abilities to boost their personal productivity. Despite the hefty price to employ these specialist managers, the productivity will increase massively, so the quantity supplied will increase faster than total costs, causing average costs to fall.

Answer 3

A larger firm can buy marketing products in bulk, reducing the average cost, as they can negotiate better unit prices due to bulk-buying, and are therefore able to spread their marketing costs over a larger range of outputs, meaning the total costs rise slower than the quantity, bringing down average costs.

Answer 4

As a firm increases in scale, they can negotiate better interest rates from the bank as the firm is more reputable and profitable than smaller firms, so banks are less cautious about lending money to the larger firms, as it is (almost) a given that they will return all the money due to their status as a lower risk firm. Despite total costs rising, these costs will be able to be spread across a wider range of outputs, leading to average costs falling.

Answer 5

As a firm gets larger, they can diversify their outputs, sources of supply, sources of finance etc., therefore spreading their risks over a larger range of outputs. These economies of diversification can make the firm less vulnerable to sudden changes in demand that would severely harm a smaller firm. Diversification increases total costs, but as the quantity supplied increases faster than the total costs, average costs fall.

Answer 6

Diversifying a firm makes it cheaper to produce a range of products than to produce each one of the products on its own. This causes total costs to rise as more specialist goods are required, but overall quantity supplied increases faster, leading to a decrease in average costs.

Answer 7

Control Failure Communication Failure Coordination Failure Motivational Failure

Answer 8

As a business increases in size past a certain point, it becomes increasingly difficult for managers to control the workforce. This can lead to a delegation of managerial functions to people with a lack of appropriate experience. Along with this, an increase in the workforce to manager ratio can lead to workers becoming less productive as they know that managers are less likely to look at their work with a fine-tooth comb. Their mistakes lead to an increase in total costs, which rise faster than supply, so average costs increase.

Answer 9

Within a large organisation, there may be too many layers of management between the top managers and ordinary production workers, so staff can begin to feel unappreciated. The time that it takes to spread messages throughout the firm is completely wasted, so this also causes a reduction in productivity. This leads to reducing productivity as the unit costs begin to rise faster than supply does.

Answer 10

As a business gets larger, each individual worker will feel less important within the company as they feel more dispensable. This will hit your productivity as you feel less motivated to work harder. Over-specialisation within large firms may lead to de-skilling, in a situation where workers perform repetitive and boring tasks, with little incentive to use personal initiative to help their employers. This drop in productivity leads to total costs rising faster than supply does, so average costs rise.

Answer 11

As a firm increases in scale, they need to employ more departments that it didn't have to before. An IT department is set up, and an HR department is set up to deal with hiring and internal disputes. A marketing department is set up to market the products etc. The more departments that are present within a firm make it more difficult to coordinate goals within all departments. The goals set by SLT become more and more vague, so departments inevitably make their own, many of which contradict goals in other departments. Having departments operating in different ways causes productivity to fall, so quantity supplied rises slower than total costs do, causing average costs to rise.

Answer 12

Plant Economies Scale vs. Firm Economies of Scale

Answer 13

If a whole firm grows significantly, they do not necessarily grow each individual plant, possibly increasing the number of plants they own. The diseconomies of scale that occur on a larger scale within a firm may not necessarily translate to the diseconomies that occur within an individual plant.

Answer 14

As a firm experiences increasing returns to scale, there will be falling long-run average costs (economies of scale). Conversely, if a firm experiences decreasing returns to scale, there will be rising long-run average costs (diseconomies of scale). For example, outputs are increasing faster than inputs, so if wage rates and other factor prices remain the same at all levels of output, the money cost of producing a unit of output therefore falls. This works conversely for outputs increasing slower than inputs.

Answer 15

When the industry, that the firm is a part of, grows.

Answer 16

Cluster effects, with many firms within the same industry being located close to each other and therefore providing markets, sources of supply and trained labour for one another.

Answer 17

The growth of a market raising the average costs of all the firms in an industry.

Answer 18

Many firms in the same industry being near one another leads to a large number of firms all competing for the same labour. This leads to firms having to raise their wages in order to incentivise workers to join their firm. This increases unit wage costs for employers. Secondly, there may be an increase in local and regional traffic congestion, increasing delivery times and delivery costs.

Answer 19

Car manufacturing.

Answer 20

The moving assembly line.

Answer 21

Ford, USA.

Answer 22

Henry Ford.

Answer 23

Car manufacturers to mark the beginning of mass production within the car manufacturing business.

Answer 24

The outputs increased massively, far more than the increased labour and capital costs did.

Answer 25

When many companies are part of one industry with no clear leader, meaning that no one company can influence prices, wages etc. as they do not have enough market share.

Answer 26

Lower production runs, which occurred due to Toyota's success within JIT manufacturing, along with a large amount of outsourcing to outside suppliers.

Answer 27

As there is a wider variety within the market, consumers demand a wider range of items.

Answer 28

Due to market fragmentation, car companies have to produce a much wider range of vehicle. This means that the way cars are produced is changing massively, with less requirement for huge and capital intensive factories.

Answer 29

There is a horizontal line between Q1 and Q2 that demonstrates that the exhaustion of the benefits of economy to scale does not immediately lead to diseconomies of scale.

Answer 30

No firms benefit or suffer from economies / diseconomies of scale.

Answer 31

Demonstrates the economies of small-scale production. Diseconomies of scale set in much sooner comparatively to the symmetrical U-shape LRAC curve.

Answer 32

Large-scale production, with diseconomies of scale setting in only when substantial economies of scale have been achieved comparatively to the U-shape LRAC curve.

Answer 33

Δ% outputs > Δ% inputs

Answer 34

Δ% outputs = Δ% inputs

Answer 35

Δ% outputs < Δ% inputs

Answer 36

IT IS ALL RELATIVE! Δ% means percentage change. It is relative to whatever was before it.

Answer 37

510 TL (row 3) 80 + x TL (row 4) 80 + x = 4/3(510) x = 600

Answer 38

Increasing Increasing Constant Decreasing

Answer 39

The lowest level of outputs where a firm can take full advantage of the economies of scale.

Answer 40

The LRAC of a business cannot be any lower than this point.

Answer 41

The additional cost incurred if a firm increases output when all the factors of production are variable.

Answer 42

The LRAC curve also falls.

Answer 43

The LRAC curve also rises.

Answer 44

The LRAC curve must therefore be U-shaped.

Answer 45

Super-tankers (boats).

Answer 46

* U-Shape * L-Shape

Answer 47

The economies of scale never give way to diseconomies of scale, but rather to a flattening-out of LRAC.

Answer 48

Within manufacturing industries involving large scale production.

Answer 49

The lowest output at which long-run average costs have been reduced to the minimum level that can be achieved.

Answer 50

I know the answer isn't there, but it's at C1Q1.

Answer 51

The output increases, while not increasing average costs, therefore increasing the profit of the company to a certain point.

Answer 52

Falling long-run average costs of production when a firm increases its size of plant.

Answer 53

Increasing long-run average costs of production when a firm increases its size of plant.

Answer 54

Technical, Managerial, Finance-Raising.

Answer 55

Communication, Control, Coordination, Motivational.

Answer 56

Increasing and decreasing returns to scale.

Answer 57

Yes. The trough of the curve.