Economies and Diseconomies of Scale Flashcards
Inputs and Costs in the Long Run
Both variable
What are Inputs and Costs in the Short Run
Both fixed
What happens when firms change inputs that were fixed in the short run
It changes its size or scale
How must a firm increase production in the long run
It needs to increase its fixed inputs otherwise they will experience diseconomies of scale
What type of plan will a firm choose when planning its future activities in the long run
The one which minimises costs for the intended minimum level of output
What does the long run average total cost curve represent
Lowest possible average cost or cost per unit of output, for every level of output
Given resources are variable
What is the shape of the LRAC curve
U shape
Nothing to do with diminishing returns - diminishing returns only exists in the short run
Where can the U shape of the LRAC curve be found
In increasing and decreasing returns of scale
What are Economies of Scale
Decreases in the average costs of production over the long run as a firm increases all it inputs
How do Economies of Scale explain the downward-sloping portion of the LRAC Curve
As output increases - and a firm increases all inputs - average costs or cost per unit output falls
What does falling average costs as output increases mean
The firm is experiencing increasing returns to scale
What is Technical Economies of Scale
Concerned with the Technology of Production
When is economies of scale substantial for an industry
When the overhead costs were enormous compared to the operating cost
What is a Natural Monopoly
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
What is Managerial Economies of Scale
When specialist managers make better decisions
Disadvantage of Managerial Economies of Scale
At some point - the organisation will find it more difficult to manage - diseconomies of scale are likely to occur
What is Marketing Economies of Scale
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
What is Financial Economies of Scale
When a firm with a strong reputation may be able to raise finance for further expansion on more favourable terms than a smaller firm
What is Purchasing Economies of Scale
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
What is Risk Bearing Economies of Scale
When larger firms can diversify into different product areas and markets - leads to a more predictable overall demand
What is Diseconomies of Scale
When increases in the average costs of production occur as a firm increases its output by increasing all its inputs
What part of the LRAC curve are diseconomies of scale responsible for
The upward sloping part
Reasons for Diseconomies of Scale
Co-ordination and monitoring difficulties
Communication difficulties
Poor worker motivation
