4.5 Economies And Disececonomies Of Scale

Question 1

What are internal economies of scale?

Answer 1

• occur when a firm becomes larger.
• Average costs of production fall as output
  increases.

Question 2

Give examples of internal economies of scale

A cool mnemonic to remember this is Really Fun Mums Try Making Pies

Answer 2

• Risk-bearing
• Financial
• Managerial
• Technological
• Marketing
• Purchasing

Question 3

Internal economies of scale-Risk Bearing

Answer 3

• When a firm becomes larger, they can expand their production range.
• Therefore, they can spread the cost of uncertainty.
• If one part is not successful, they have other parts to fall back on.

Question 4

Internal economies of scale-Financial

Answer 4

• Banks are willing to lend loans more cheaply to larger firms, because they are deemed less risky.
• Therefore, larger firms can take advantage of cheaper credit.

Question 5

Internal economies of scale-Managerial

Answer 5

• Larger firms are more able to specialise and divide their labour.
• They can employ specialist managers and supervisors, which lowers average costs.

Question 6

Internal economies of scale-Technological

Answer 6

• Larger firms can afford to invest in more advanced and productive machinery and capital
• This will lower their average costs.

Question 7

Internal economies of scale-Marketing

Answer 7

• Larger firms can divide their marketing budgets across larger outputs, so the average cost of advertising per unit is less than that of a smaller firm.

Question 8

Internal economies of scale-Purchasing

Answer 8

• Larger firms can bulk-buy, which means each unit will cost them less.
• For example, supermarkets have more buying power from farmers than corner shops, so they can negotiate better deals.

Question 9

What are network economies of scale?

Answer 9

• These are gained from the expansion of
  e-commerce.
• Large online shops, such as eBay, can add extra goods and customers at a very low cost, but the revenue gained from this will be significantly larger.

Question 10

What are external economies of scale?

Answer 10

• These occur within the industry.
• For example, local roads might be improved, so transport costs for the local industries will fall.
• Also, there might be more training facilities or more research and development, which will also lower average costs for firms in the local area.

Question 11

What are diseconomies of scale?

Answer 11

• These occur when output passes a certain point and average costs start to increase per extra unit of output produced.

Question 12

Give examples of diseconomies of scale

Answer 12

• Control: It becomes harder to monitor how productive the workforce is, as the firm
  becomes larger.
• Coordination: It is harder and complicated to coordination every worker, when there
  are thousands of employees.
• Communication: Workers may start to feel alienated and excluded as the firm
  grows. This could lead to falls in productivity and increases in average costs, as they lose their motivation.

Question 13

What does the LRAC curve depict?

Answer 13

• It shows when economies and diseconomies of scale are occurring.

Question 14

Explain the LRAC curve

Answer 14

• Average costs fall, since firms can take advantage of economies of scale-this means average costs are falling as output increases.
• After the optimum level of output, where average costs are at their lowest, average costs rise due to diseconomies of scale.

Question 15

What is the lowest point of the LRAC known as?

Answer 15

• The minimum efficient scale

Question 16

What is the minimum efficient scale?

Answer 16

• This is where the optimum level of output is since costs are lowest, and the economies of scale of production have been fully utilised.

Question 17

What is the relationship between returns to scale and economies or diseconomies of scale?

Answer 17

• Returns to scale increases when the output increases by a greater proportion to the
  increase in inputs
• This occurs where there are economies of scale and factor inputs become more productive.
• Decreasing returns to scale are linked to diseconomies of scale, since it occurs when factor inputs become less productive.