Economies and Diseconomies of Scale

Question 1

Inputs and Costs in the Long Run

Answer 1

Both variable

Question 2

What are Inputs and Costs in the Short Run

Answer 2

Both fixed

Question 3

What happens when firms change inputs that were fixed in the short run

Answer 3

It changes its size or scale

Question 4

How must a firm increase production in the long run

Answer 4

It needs to increase its fixed inputs otherwise they will experience diseconomies of scale

Question 5

What type of plan will a firm choose when planning its future activities in the long run

Answer 5

The one which minimises costs for the intended minimum level of output

Question 6

What does the long run average total cost curve represent

Answer 6

Lowest possible average cost or cost per unit of output, for every level of output

Given resources are variable

Question 7

What is the shape of the LRAC curve

Answer 7

U shape

Nothing to do with diminishing returns - diminishing returns only exists in the short run

Question 8

Where can the U shape of the LRAC curve be found

Answer 8

In increasing and decreasing returns of scale

Question 9

What are Economies of Scale

Answer 9

Decreases in the average costs of production over the long run as a firm increases all it inputs

Question 10

How do Economies of Scale explain the downward-sloping portion of the LRAC Curve

Answer 10

As output increases - and a firm increases all inputs - average costs or cost per unit output falls

Question 11

What does falling average costs as output increases mean

Answer 11

The firm is experiencing increasing returns to scale

Question 12

What is Technical Economies of Scale

Answer 12

Concerned with the Technology of Production

Question 13

When is economies of scale substantial for an industry

Answer 13

When the overhead costs were enormous compared to the operating cost

Question 14

What is a Natural Monopoly

Answer 14

When the largest firm is able to produce at a lower average cost than smaller firms
Proves a competitive advantage that no other firms will be abled to become established in the firm

Question 15

What is Managerial Economies of Scale

Answer 15

When specialist managers make better decisions

Question 16

Disadvantage of Managerial Economies of Scale

Answer 16

At some point - the organisation will find it more difficult to manage - diseconomies of scale are likely to occur

Question 17

What is Marketing Economies of Scale

Answer 17

Advertising is usually a fixed cost - spread over more units for large firms - cost per unit is lower as a firm increases its scale of production

The cost per product of advertising several products may also be lower than the cost of advertising just one

Brand awareness - More likely to be trusted by customers - no need to advertise as much to get sales

Question 18

What is Financial Economies of Scale

Answer 18

When a firm with a strong reputation may be able to raise finance for further expansion on more favourable terms than a smaller firm

Question 19

What is Purchasing Economies of Scale

Answer 19

When a large firm operating on a large scale can negotiate good deals with suppliers when buying in bulk - reduces average cost as output increases

A firm can increase proximity to the supplier’s factory - which would reduce costs even more

Question 20

What is Risk Bearing Economies of Scale

Answer 20

When larger firms can diversify into different product areas and markets - leads to a more predictable overall demand

Question 21

What is Diseconomies of Scale

Answer 21

When increases in the average costs of production occur as a firm increases its output by increasing all its inputs

Question 22

What part of the LRAC curve are diseconomies of scale responsible for

Answer 22

The upward sloping part

Question 23

Reasons for Diseconomies of Scale

Answer 23

Co-ordination and monitoring difficulties

Communication difficulties

Poor worker motivation