Ch. 7 Economies of Scale and Scope

Question 1

Bottleneck

Answer 1

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.

Question 2

Law of diminishing returns

Answer 2

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.

Question 3

increasing marginal costs lead to

Answer 3

increase in profit

Question 4

reduction in average cost equals

Answer 4

immediate increase in average costs

Question 5

diminishing marginal productivity implies

Answer 5

increasing marginal cost

Question 6

law of diminishing returns in short run

Answer 6

arises from fixity or at least one factor in production like capital or plant size

Question 7

law of diminishing returns in the long run

Answer 7

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

Question 8

Economies of scale

Answer 8

are cost advantages reaped by companies when production becomes efficient.

Ideally, the larger the business, the more the cost savings.

Question 9

Companies can achieve economies of scale by

Answer 9

increasing production and lowering costs. This happens because costs are spread over a larger number of goods. Costs can be both fixed and variable.

Question 10

Economies of scale are an important concept for any business in any industry as it represents

Answer 10

cost-savings and competitive advantages larger businesses have over smaller ones.

Question 11

There are several reasons why economies of scale give rise to lower per-unit costs.

Answer 11

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.

Question 12

Economies of scale can be both internal and external.

Answer 12

Internal economies are caused by factors within a single company while external factors affect the entire industry.

Question 13

Internal economies of scale happen when

Answer 13

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.

Question 14

External economies of scale, on the other hand, are achieved because of

Answer 14

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.

Question 15

In economics charts, this has been illustrated with some flavor

Answer 15

of a U-shaped curve, in which the average cost per unit falls and then rises.

Question 16

Dis-economies of scale

Answer 16

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.

Question 17

constant return to scale

Answer 17

if long run costs are constant with respect to output

then you have a constant return to scale

Question 18

diseconomies of scale

Answer 18

if long run costs rise with output you have decreasing returns to scale

Question 19

economies of scale

Answer 19

if long run costs fall with output you have increasing returns on scale

Question 20

permanent factors that remain the same that cause diminishing marginal returns in the short run can

Answer 20

also decrease returns to scale in the long run

Question 21

ex of permanent factors

Answer 21

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

Question 22

important to know whether your long run costs are exhibiting

Answer 22

constant, decreasing or increasing returns to scale.

Question 23

learning curve

Answer 23

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.

Question 24

learning curves mean that current production

Answer 24

lowers future costs -strategic consequences

Question 25

In summary a learning curve is

Answer 25

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.

Question 26

the slope of the learning curve represents

Answer 26

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.

Question 27

The steeper the slope of the learning curve…

Answer 27

the higher the cost savings per unit of output.

Question 28

As learning increases, it

Answer 28

decreases the cost per unit of output initially before flattening out, as it becomes harder to increase the efficiencies gained through learning.

Question 29

This standard learning curve is known as the 80% learning curve

Answer 29

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.

Question 30

economies of scope

Answer 30

describe situations where producing two or more goods together results in a lower marginal cost than producing them separately.

Question 31

Economies of scope specifically works with

Answer 31

producing a variety of different products together to reduce costs

Question 32

While economies of scale works with

Answer 32

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.

Question 33

Economies of scope can result from goods that are

Answer 33

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.

Question 34

diseconomies of scope

Answer 34

the cost of producing two products together is higher than the cost of producing them separately.

Question 35

The law of diminishing marginal returns refers to the general tendency for __________to eventually diminish.

Answer 35

Marginal productivity

Question 36

Which of the following helps explain why marginal cost eventually increases as output increases?

Answer 36

The law of diminishing returns

Question 37

If a firm doubles its inputs and output more than doubles, its production process exhibits

Answer 37

economies of scale

Question 38

Increasing complexity of management and challenges of coordination as firms produce more of the same product can be a source of

Answer 38

diseconomies of scale

Question 39

Constant returns to scale means that as all inputs are increased,

Answer 39

total output increases in the same proportion as do the inputs.

Question 40

Learning curves describe a relationship between

Answer 40

average variable cost and the cumulative number of units produced.

Question 41

Diseconomies of scale imply that

Answer 41

the firm should consider a reduction in production.

Question 42

Economies of scope exist when

Answer 42

changing the mix of products produced reduces average cost.

Question 43

If economies of scope exist across two products, we would expect that firms will likely ________.

Answer 43

Produce and sell both products

Question 44

Increasing complexity of management and challenges of coordination as firms produce a wider variety of products can be a source of

Answer 44

diseconomies of scope.

Question 45

Under decreasing returns to scale, average cost

Answer 45

rises as the quantity produced increases. Over this range of output, the marginal cost curve is higher than the average cost curve.

Question 46

Under increasing returns to scale, average cost

Answer 46

falls as the quantity produced increases. Over this range of output, the marginal cost curve is lower than the average cost curve.

Question 47

Under constant returns to scale, average cost

Answer 47

remains constant as the quantity produced increases. Over this range of output, the marginal cost curve is equivalent to the average cost curve.