5. Cost Behaviour

Question 1

Define economies of scale.

Answer 1

A reduction in cost per unit due to an increase in the size of the firm or the industry.

Question 2

Define internal economies of scale

Answer 2

Internal economies of scale arise from the firm either through its own internal growth or acquisition. This type is under the control of management.

Question 3

What is division of labour?

Answer 3

As a firm increases in size it can break down jobs into individual tasks that can be assigned to separate individuals.

Question 4

Define external economies of scale.

Answer 4

A fall in cost per unit due to a growth in the size of the industry.

Question 5

What is minimum efficient scale?

Answer 5

The lowest level of output at which a firm can achieve its minimum average cost.

Question 6

If a firm is producing quantities below its minimum efficient scale what are the potential effects?

Answer 6

The unit costs of production may be higher than its rivals putting it at a competitive disadvantage?

Question 7

What is the concentration ratio?

Answer 7

Th extent to which large firms dominate an industry.