4.1.4.5 Economies and diseconomies of scale Flashcards
What are internal economies of scale?
Internal economies of scale occur when a firm grows larger, leading to lower average costs of production. Examples include financial, managerial, and technical economies.
What are external economies of scale?
External economies of scale occur within an industry, benefiting all firms. Examples include improved infrastructure, better training facilities, and shared R&D.
What is the mnemonic for internal economies of scale?
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Risk-bearing
Financial
Managerial
Technological
Marketing
Purchasing
What are risk-bearing economies of scale?
Risk-bearing economies occur when larger firms diversify production, spreading the cost of uncertainty across multiple products or markets.
What are financial economies of scale?
Financial economies occur when larger firms access cheaper credit or loans because they are seen as less risky by banks.
What are managerial economies of scale?
Managerial economies occur when larger firms employ specialist managers, improving efficiency and lowering average costs.
What are technological economies of scale?
Technological economies occur when larger firms invest in advanced machinery, increasing productivity and reducing average costs.
What are marketing economies of scale?
Marketing economies occur when larger firms spread advertising costs over a larger output, reducing the average cost per unit.
What are purchasing economies of scale?
Purchasing economies occur when larger firms buy inputs in bulk, negotiating lower prices per unit.
What are network economies of scale?
Network economies occur in e-commerce, where large online platforms (e.g., eBay) can add goods and customers at low costs, increasing revenue significantly.
What are diseconomies of scale?
Diseconomies of scale occur when a firm grows too large, leading to higher average costs due to issues like poor communication, coordination, and control.
What causes diseconomies of scale?
Causes include:
Control issues: Harder to monitor productivity.
Coordination problems: Difficult to manage large workforces.
Communication breakdowns: Workers feel alienated, reducing motivation.
What is the relationship between returns to scale and economies/diseconomies of scale?
Increasing returns to scale: Linked to economies of scale (falling average costs).
Decreasing returns to scale: Linked to diseconomies of scale (rising average costs).
What is the minimum efficient scale?
The minimum efficient scale is the lowest level of output where long-run average costs are minimized, and economies of scale are fully utilized.
What is the shape of the long-run average cost (LRAC) curve?
The LRAC curve is typically U-shaped due to economies of scale (falling costs) and diseconomies of scale (rising costs). However, it can also be L-shaped.
What does the L-shaped LRAC curve suggest?
The L-shaped LRAC curve suggests that after initial economies of scale, average costs continue to fall or stabilize, even if diseconomies of scale exist, due to offsetting technical or production efficiencies.
How does the LRAC curve relate to the SRAC curve?
The LRAC curve envelopes the SRAC curve, always being equal to or below it. The LRAC shifts due to external economies of scale.
What is the significance of the minimum efficient scale for industry structure?
The minimum efficient scale determines the optimal firm size and can create barriers to entry, as smaller firms may struggle to compete with larger firms that have lower average costs.
What is an example of external economies of scale?
Improved local infrastructure (e.g., roads) reduces transport costs for all firms in the area, lowering average costs.
How do diseconomies of scale affect firm productivity?
Diseconomies of scale reduce productivity as firms become too large, leading to inefficiencies in communication, coordination, and control.
What is the relationship between economies of scale and the LRAC curve?
Economies of scale cause the LRAC curve to slope downward, while diseconomies of scale cause it to slope upward.
What is the difference between internal and external economies of scale?
Internal economies: Occur within a firm as it grows.
External economies: Occur within an industry, benefiting all firms.
How do economies of scale affect barriers to entry?
Economies of scale create barriers to entry, as new firms must achieve a large scale of production to compete with established firms’ lower average costs.
What is the relationship between the LRAC curve and industry growth?
As an industry grows, external economies of scale can shift the LRAC curve downward, reducing average costs for all firms in the industry.
