Chapter 2 - The horizontal boundaries of the firm Flashcards
economies of scale
the production process for a specific good or service exhibits economies of scale over a range of output when AC declines over that range
diseconomies of scale
if AC is increasing, MC > AC
economies of scope
if a firm acquires savings as it increases the variety of goods and services it produces
indivisibility
an input cannot be scaled down below a certain minimum size, even when the level of output is very small
economies of scale can appear due to:
- spreading of product-specific fixed costs
- tradeoffs among alternative technologies
short-term economies of scale
reductions in AC due to increases in capacity utilization (occur within a plant of a given size)
long-term economies of scale
reductions due to adoption of a technology that has high FC, but lower VC. If enough time, a firm can choose a plant that best meets its production needs
throughput
movement of raw material into the plant and the distribution and sale of finished goods
indivisibilities are more likely when …
… production is capital intensive
capital intensive
when the costs of productive capital (e.g., factories and assembly lines) represent a significant percentage of total costs
material or labor intensive
when most production expenses go to raw materials or labor
substantial product-specific economies of scale are likely when …
… production is capital intensive
minimal product-specific economies of scale are likely when …
… production is material or labor intensive
division of labor
the specialization of productive activities
extent of the market
magnitude of demand for productive activities
smith’s theorem states that:
individuals/firms will not make specialized investments unless the market is big enough to support them
–> larger markets will support narrower specialization
special sources of economies of scale and scope
- density
- purchasing
- advertising
- R&D
- physical properties of production
- inventories
economies of density
cost saving that arises within a transportation network due to greater geographic density of customers
umbrella branding
is effective when consumers use the information in advertisement about one product to make inferences about other products with the same brand name –> reducing advertising costs per effective image
cube-square rule
as the volume of the vessel increases by a given proportion, the surface area increases by less than this proportion
complementarities
describe synergies among organizational practices
practices display complementarities when …
… the benefits of introducing one practice are enhanced by the presence of others
sources of diseconomies of scale
- labor costs and firm size
- spreading specialized resources too thin
- bureaucracy
compensating differential
the wage premium that firms must pay to lure workers to less attractive jobs
learning (experience curve)
advantages that flow from accumulating experiences and know-how
a learning curve slope of 1.0 implies …
… no learning effect
firm-specific learning
worker knowledge is tied to the current employment
task-specific learning
capture value for themselves
learning economies
reductions in unit costs due to an accumulating experience over time
dominant general management logic
the way in which managers conceptualize the business and make critical allocations
internal capital market
allocation of available working capital within the firm as opposed to the capital raised outside the firm
advantages for firms to rely on cash cows to find capital to fund raising stars:
- difficulties finding external investors due to asymmetric information
- outsiders will be reluctant to provide capital to firms that have existing debt
- external finance consumes monitoring resources
problematic justification for diversification
- diversifying shareholders’ portfolios
- identifying undervalued firms
corporate governance
mechanisms through which corporations and their managers are controlled by shareholders
