Economics Topic 5 - economies and diseconomies of scale

Question 1

What is average cost?

Answer 1

Cost per unit of output = total cost/output

Question 2

Output

Answer 2

The quantity of goods or services produced in a given time period, by a firm, industry or country

Question 3

Economies of scale

Answer 3

Falling average costs due to expansion/increased output

Question 4

Internal economics of scale

Answer 4

Falling average costs enjoyed by an individual firm when it expands

Question 5

external economics of scale

Answer 5

Falling average costs enjoyed by all firms in an industry when it expands

Question 6

Diseconomies of scale

Answer 6

rising average costs when a firm becomes too big (when output rises past the minimum efficiency scale)

Question 7

What does the Long run Average cost curve shape?

Answer 7

U shaped

Question 8

What are the different Internal economies of scale reasons for average costs decreasing as output rises?

Answer 8

Risk bearing Really
Financial Fun
Managerial Mums
Technical Try
Marketing Making
Purchasing Pies

Question 9

What are risk-bearing economies of scale?

Answer 9

When firms diversity into selling multiple product lines and selling in multiple geographic markets.
This reduces risk of losing revenue or profit from any one market, and even if this happens there is less risk as sales in another country can still make profit

Question 10

What are financial EOS

Answer 10

Larger firms are able to borrow money from banks for cheaper interest rates because it is less risky as these firms are likely to be able to pay back the money

Question 11

What are managerial EOS?

Answer 11

Larger firms can afford to employ specialist managers who are able to make the production process more cost-efficient.

Question 12

What are technical EOS?

Answer 12

Large firms can afford specialist machinery and capital equipment that can be used to produce large quantities of goods more effectively.

Question 13

What are marketing EOS?

Answer 13

Large firms can sell more product lines and sot see a significant increase in their advertising spend. (i.e. firms can advertise 5 product lines for a similar cost to advertising 4 product lines.

Question 14

What are purchasing EOS?

Answer 14

Larger firms can order supplies of raw materials in bulk and negotiate discounts within their supplies

Question 15

What are the main causes of diseconomies of scale?

Answer 15

Bureaucracy
Communication problems
Lack of control
Distance between top management and workers at the bottom of the organisation

Question 16

Why is Bureaucracy a diseconomy of scale?

Answer 16

As firms get larger they rely more on bureaucracy which increases the resources used in administration which increases costs.

Question 17

Communication problems

Answer 17

Hundreds of thousands of workers are likely to be spread all around the word which can lead to time, language and cultural barriers for communication.

Question 18

Lack of control Diseconomies Of Scale

Answer 18

Very large businesses are difficult to control and coordinate which makes running an organisation very demanding and involves different layers which means that the top can be removed from the needs at the bottom.

Question 19

What are external economies of scale?

Answer 19

These are EOS that occur outside of a firm but withing an industry which means that an investment can lead to decreasing costs for a company in that industry.

Question 20

What are the different factors of external economies of scale

Answer 20

Skilled labour - industries concentrated in the same area can employ skilled workers if some leave a company and more workers will be attracted to this area making it easier to recruit workers

Infrastructure - infrastructure will be built to meet the needs of an industry which will increase the efficiency of the firms in the area and lower average costs

Access to suppliers - Industries that cluster together will find suppliers more easily as they will be likely to set up nearby which helps decrease average costs.

Similar businesses in the area - businesses are likely to co-operate so that they all benefit from each other and share e.g. research, development, training. This will decrease overall costs and therefore average costs.

Question 21

Why could external economies of scale not be important?

Answer 21

Lots of competition which might mean a firm has to close down if they are not competitive.
Price of land and other factors of production can increase
Not all firms need external training facilities or trained labour
Internal economies of scale could be more important, so if they cannot decrease average costs co-operating with other firms could be useless.
This could be useless if the industry of that firm is not that competitive.
External economies of scale depends on the size of the benefit of the firm.