Economics Topic 5 - economies and diseconomies of scale Flashcards
What is average cost?
Cost per unit of output = total cost/output
Output
The quantity of goods or services produced in a given time period, by a firm, industry or country
Economies of scale
Falling average costs due to expansion/increased output
Internal economics of scale
Falling average costs enjoyed by an individual firm when it expands
external economics of scale
Falling average costs enjoyed by all firms in an industry when it expands
Diseconomies of scale
rising average costs when a firm becomes too big (when output rises past the minimum efficiency scale)
What does the Long run Average cost curve shape?
U shaped
What are the different Internal economies of scale reasons for average costs decreasing as output rises?
Risk bearing Really
Financial Fun
Managerial Mums
Technical Try
Marketing Making
Purchasing Pies
What are risk-bearing economies of scale?
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
What are financial EOS
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
What are managerial EOS?
Larger firms can afford to employ specialist managers who are able to make the production process more cost-efficient.
What are technical EOS?
Large firms can afford specialist machinery and capital equipment that can be used to produce large quantities of goods more effectively.
What are marketing EOS?
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.
What are purchasing EOS?
Larger firms can order supplies of raw materials in bulk and negotiate discounts within their supplies
What are the main causes of diseconomies of scale?
Bureaucracy
Communication problems
Lack of control
Distance between top management and workers at the bottom of the organisation
Why is Bureaucracy a diseconomy of scale?
As firms get larger they rely more on bureaucracy which increases the resources used in administration which increases costs.
Communication problems
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.
Lack of control Diseconomies Of Scale
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.
What are external economies of scale?
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.
What are the different factors of external economies of scale
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.
Why could external economies of scale not be important?
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.
