4.1.4.5 Economies and diseconomies of scale

Question 1

economies of scale

Answer 1

long-run average total cost falls as the quantity of output increases

Question 2

diseconomies of scale

Answer 2

long-run average total cost rises as the quantity of output increases

Question 3

minimum efficient scale

Answer 3

the level of output at which all economies of scale have been fully exploited

Question 4

Internal economies of scale

Answer 4

The cost benefits that an individual firm can enjoy when it expands.

Question 5

External economies of scale

Answer 5

economies of scale that arise from the expansion of the industry in which a firm is operating

Question 6

Technical economies of scale

Answer 6

reductions in average costs of production due to improvements to the production process

Question 7

Financial economies of scale

Answer 7

A situation where large firms are able to borrow money on better terms than smaller firms which makes the cost of financing investment and therefore unit of costs decrease

Bigger businesses will get lower interest rates on loans as they are seen as safe investments

Question 8

Purchasing/Bulk economies of scale

Answer 8

A reduction in unit costs as a result of buying in large quantities; these are sometimes called buying economies of scale.

Question 9

Managerial economies of scale

Answer 9

larger firms have greater scope to benefit from the specialisation of labour at supervisory and manager level

A larger firm can employ specialist managers that boost productivity and bring skills

Question 10

Risk-bearing economies of scale

Answer 10

The ability of large firms to spread the costs of uncertainty over a wider range of activities and therefore reduce their unit cos

Question 11

agglomeration economies

Answer 11

The savings to an individual enterprise derived from locational association with a cluster of other similar economic activities, such as other factories or retail stores

Question 12

Internal economies of scale examples

Answer 12

risk bearing, financial, management, technical, marketing, purchasing

Question 13

External economies of scale examples

Answer 13

transport, suppliers, r+d

Question 14

• Reasons for diseconomies of scale.

Answer 14

1. Communication problems
2. Alienation of the workforce
3. Poor coordination and decision-making

Question 15

explain each reason for diseconomies of scale.(poor communcation)

Answer 15

Poor communication in a large firm. It can be hard to communicate ideas and new working practices.

Question 16

explain each reason for diseconomies of scale.(alienation)

Answer 16

Working in a highly specialized assembly line can be very boring if workers become de-motivated. In a large firm, there is an increased gap between top and bottom e.g. call centres

Question 17

explain each reason for diseconomies of scale.(Lack of control)

Answer 17

when there is a large number of workers it is easier to escape with not working very hard because it is more difficult for managers to notice shirking.