Ch. 7 Economies of Scale and Scope Flashcards
Bottleneck
A bottleneck is a point of congestion in a production system (such as an assembly line or a computer network) that occurs when workloads arrive too quickly for the production process to handle. The inefficiencies brought about by the bottleneck often creates delays and higher production costs.
Law of diminishing returns
a theory in economics that predicts that after some optimal level of capacity is reached, adding an additional factor of production will actually result in smaller increases in output.
increasing marginal costs lead to
increase in profit
reduction in average cost equals
immediate increase in average costs
diminishing marginal productivity implies
increasing marginal cost
law of diminishing returns in short run
arises from fixity or at least one factor in production like capital or plant size
law of diminishing returns in the long run
increase the size of plant, hire more workers, buy more machines, and removes production bottle necks.
turns fixed costs into variable costs in the long run
Economies of scale
are cost advantages reaped by companies when production becomes efficient.
Ideally, the larger the business, the more the cost savings.
Companies can achieve economies of scale by
increasing production and lowering costs. This happens because costs are spread over a larger number of goods. Costs can be both fixed and variable.
Economies of scale are an important concept for any business in any industry as it represents
cost-savings and competitive advantages larger businesses have over smaller ones.
There are several reasons why economies of scale give rise to lower per-unit costs.
First, specialization of labor and more integrated technology boost production volumes. Second, lower per-unit costs can come from bulk orders from suppliers, larger advertising buys, or lower cost of capital. Third, spreading internal function costs across more units produced and sold helps to reduce costs.
Economies of scale can be both internal and external.
Internal economies are caused by factors within a single company while external factors affect the entire industry.
Internal economies of scale happen when
company cuts costs internally, so they’re unique to that particular firm.
lowering their costs and raising their production levels—because they can buy resources in bulk, have a patent or special technology, or because they can access more capital.
External economies of scale, on the other hand, are achieved because of
external factors, or factors that affect an entire industry. That means no one company controls costs on its own.
These occur when there is a highly-skilled labor pool, subsidies and/or tax reductions, and partnerships and joint ventures—anything that can cut down on costs to many companies in a specific industry.
In economics charts, this has been illustrated with some flavor
of a U-shaped curve, in which the average cost per unit falls and then rises.
Dis-economies of scale
Diseconomies of scale happen when a company or business grows so large that the costs per unit increase. It takes place when economies of scale no longer function for a firm.
With this principle, rather than experiencing continued decreasing costs and increasing output, a firm sees an increase in costs when output is increased.
constant return to scale
if long run costs are constant with respect to output
then you have a constant return to scale
diseconomies of scale
if long run costs rise with output you have decreasing returns to scale
economies of scale
if long run costs fall with output you have increasing returns on scale
permanent factors that remain the same that cause diminishing marginal returns in the short run can
also decrease returns to scale in the long run
ex of permanent factors
managerial structure is important in the production process
as corp grows so do coordination, control, and monitoring.
giving management more decisions results in managerial bottlenecks that raise costs
important to know whether your long run costs are exhibiting
constant, decreasing or increasing returns to scale.
learning curve
a concept that graphically depicts the relationship between the cost and output over a defined period of time, normally to represent the repetitive task of an employee or worker.
learning curves mean that current production
lowers future costs -strategic consequences
In summary a learning curve is
visual representation of how long it takes to acquire new skills or knowledge.
provides measurement and insight into all the above aspects of a company.
the slope of the learning curve represents
the rate in which learning new skills translates into cost savings for a company.
That is why the learning curve is downward sloping in the beginning with a flat slope toward the end, with the cost per unit depicted on the Y-axis and total output on the X-axis.
The steeper the slope of the learning curve…
the higher the cost savings per unit of output.
As learning increases, it
decreases the cost per unit of output initially before flattening out, as it becomes harder to increase the efficiencies gained through learning.
This standard learning curve is known as the 80% learning curve
It shows that for every doubling of a company’s output, the cost of the new output is 80% of the prior output.
As output increases, it becomes harder and harder to double a company’s previous output, depicted using the slope of the curve, which means cost savings slow over time.
economies of scope
describe situations where producing two or more goods together results in a lower marginal cost than producing them separately.
Economies of scope specifically works with
producing a variety of different products together to reduce costs
While economies of scale works with
producing more of the same good in order to reduce costs by increasing efficiency.
Finding a productive use or market for the co-products can reduce both waste and costs and increase revenues.
Economies of scope can result from goods that are
co-products or complements in production, goods that have complementary production processes, or goods that share inputs to production.
for ex: breakfast items - conagra with Sara Lee and Kraft - merger
one train transporting passengers and cargo vs one train for passengers and one train for transport - double milage, gas, and fees.
farmers and milk production - when and curds
STEM training programs - students do part time internships at STEM businesses.
diseconomies of scope
the cost of producing two products together is higher than the cost of producing them separately.
The law of diminishing marginal returns refers to the general tendency for __________to eventually diminish.
Marginal productivity
Which of the following helps explain why marginal cost eventually increases as output increases?
The law of diminishing returns
If a firm doubles its inputs and output more than doubles, its production process exhibits
economies of scale
Increasing complexity of management and challenges of coordination as firms produce more of the same product can be a source of
diseconomies of scale
Constant returns to scale means that as all inputs are increased,
total output increases in the same proportion as do the inputs.
Learning curves describe a relationship between
average variable cost and the cumulative number of units produced.
Diseconomies of scale imply that
the firm should consider a reduction in production.
Economies of scope exist when
changing the mix of products produced reduces average cost.
If economies of scope exist across two products, we would expect that firms will likely ________.
Produce and sell both products
Increasing complexity of management and challenges of coordination as firms produce a wider variety of products can be a source of
diseconomies of scope.
Under decreasing returns to scale, average cost
rises as the quantity produced increases. Over this range of output, the marginal cost curve is higher than the average cost curve.
Under increasing returns to scale, average cost
falls as the quantity produced increases. Over this range of output, the marginal cost curve is lower than the average cost curve.
Under constant returns to scale, average cost
remains constant as the quantity produced increases. Over this range of output, the marginal cost curve is equivalent to the average cost curve.
