Economies and diesconomies of scale Flashcards
What are economies of scale?
A fall in the long run average costs of production as output rises
What are constant returns to scale?
Occur when a firm experiences (minimum) constant long run average total costs as it expands output
What is Minimum Efficient Scale (MES) of production?
The lowest level of output at which long run average cost is minimised = barrier to entry
What are diseconomies of scale?
A rise in the long run average costs of production as output rises
How is risk bearing economies of scale a source of internal EoS?
Large firms diversify into more products/markets, this reduces the risk of collapse and thereby the risk to investors, may result in demanding a lower return on capital
How is finance a source of economies of scale?
Larger firms considered more ‘credit worthy’ so banks charge lower interest rates to larger firms, so they have access to wide range of possibly cheaper sources of finance
How is managerial positions a source of economies of scale?
Specialist managers (division of labour) using specialist equipment
How are expensive capital inputs a source of internal economies of scale?
Large scale businesses can afford to invest in expensive and specialist machinery
How is specialisation of workers a source of economies of scale?
Larger firms can afford to employ more specialists who are likely to be more productive leading to cost savings
How is law of increased dimensions a source of internal economies of scale?
The cubic law where doubling the height and width of a tanker or building leads to more than proportionate increase in cubic capacity , opens up possibility of economies of scale in transport/freight industries and also in travel and leisure sector
How is marketing a source of internal economies of scale?
Large firms are able to afford larger, more effective advertising campaigns
How is purchasing a source of internal economies of scale?
Large firms are able to bulk buy and therefore negotiate lower costs
What are internal diseconomies of scale?
A rise in the long run average costs of production as a firm expands beyond its optimum size
How is control a source of internal diseconomies of scale?
Difficult to monitor productivity and quality of output of thousands of employees
How is co-ordination a source of internal diseconomies of scale?
Workers may lack motivation, not feeling important in a big organisation, therefore productivity may fall
How to avoid diseconomies of scale?
- Developments in human resource management
- Performance related pay schemes
- Out sourcing of manufacturing and distribution
What are the sources of diseconomies of scale?
Can occur when industry expands too quickly
What are the sources of external economies of scale?
- Better local transport network
- Lower training costs
- Research and development of facilities in local area
What happens to the LRAC curve with (dis)economies of scale?
LRAC shifts upwards with diseconomies of scale
LRAC shifts downwards with economies of scale
