economies and diseconomies Flashcards
Economies of scale meaning
the cost advantages of production on a large scale
2 types of economies of scale
internal and external
What are risk-bearing economies
when big firms can use their big profits to diversify into new areas, reducing the cost of failure in one sector
Internal economies of scale meaning
Internal economies of scale are when long run average costs fall as a firm’s quantity increases
Managerial economies?
Bigger firms can afford to hire highly skilled specialist managers, increasing a firm’s productivity and decreasing their LR average costs
Financial economies?
Bigger firms are less risky, so they can secure cheaper loans, reducing their long run average costs
What is meant by: Technical economies?
Bigger firms can invest in specialist capital, to increase a firm’s productivity and decrease their long run average costs.
External economies of scale?
External economies of scale will reduce long run average cost, as the industry expands.
What is meant by: External economies of scale: lower recruitment costs?
When an industry expands, lots of specialist workers will be move to that area to find work. This makes it easier to recruit workers, reducing a firm’s recruitment costs, decreasing their LRAC.
External economies of scale: knowledge transfers?
When an industry expands, knowledge will be transferred between firms. This helps firms learn more effective new production techniques, decreasing their LRAC.
What is meant by: Types of internal diseconomies of scale (ABC)?
Alienation
Bureaucracy
Communication
What is meant by: Alienation?
Workers feel alienated in very large firms, like they’re just another cog in the machine. This leads to demotivation, decreasing productivity, increase LRAC.
