Economies and Diseconomies of Scale Flashcards
what is economies of scale
reduction in LRAC as output increases
what are the gorups of EOS
Internal
External
What is internal economies of scale
reductions in LRATC arising from gorwht of the firm
IEOS are withn
a bs control
Mnemonic for remebering facors affecting EOS
Really
Fun
Mums
Try
Making
Pies
we need to link teh factors of economies of sclae to
lowering average costs
give the overall idea of IEOS
TC rise in each case
but
quantity will be rising much faster
therefore
average costs will be decreasing as a result
Explain Managerial EOS (1) acquiriing managers and how they make changes to costs/profits
As firm gets larger
afford to recruit specilasit managers who tend to be most effective in increaing profits through combo if increasing revs + reducing costs
i.e monitor productivity of WF and boost it
also bring in specialist skills as managers boosting prod of comp as well
Explain Managerial EOS (2) how do average costs fall and TC rise
productivity increased as we hired em so
quantity rises quicker than TC
TC rising as employ managers with a large salary
but prod increases faster than costs
so AC decrease
What are the two ways technical EOS can work
bringing in specialsit machinery
employing more workers
explain TEOS with specialsit machinery
firms can afford to bring in specialist machinery as get larger
bossting wproductivity
increase costs but prods being boosted
therefore quantity rises faster than TOTALcosts, decreasing AC
EXPLAIN THE OTHER teos
employing more workers as firm gets larger
then make em specialised whichll boost prod
costs rise through employing specilasit machinery/workers but so does prod
therefore q rises faster than TC
decreasing AC
Explain Purchasing Economies of Scale
as firms get bigger able to buy RM in bulk
when buy in bulk able to negotiate unit discounts
even though costs icnrease through buying more raw materials , quantitiy increases quicker
AC drops as costs are spread over a wider range of output
Explain Marketing EOS
As comp grows larger can bulk buy adv i.e instead of one tv ad can bulk
therefore have ability to negotiate unit rates of adv
so can spread costs over a large range of output meaning tc increase but quantity rises faster
other way to say
tc rise but q rises faster
tc rises slower than q
Explain financial eos
as bs gets big can negotiate lower IR from bank when getting a loan
as frim is reputable, profitable, proven succes so wehn go to bank and want (large) loan
banks think theyre low risk
therefore can negotiate lower IR w banks
as a result costs (from ir repayments) increase but can be spread over larger range of output
tc rise but q rises faster therefore AC decrease
explain Risk Bearing Economies of Scale
risk is cost , it spriceful
as bs gets larger they can spread risj (which is their OC ) over a larger range of output
so costs increase but quantity does faster
so were able to spread risk over larger output range therefore AC decrease as a result
What is External EOS
reductions in LRATC arising from growth of the industry in whihc a firm operates
explain where EEOS occcur
dont ocur within the business so outside of the bs control
but within the indsutry
as EEOS occcur outside of control of firm but within the industry what does it mean for the busienss
beenfit from EEos without doing anything
(but also suffer)
EEOS occur as a business grows therefore
businessgain these benefits as they get larger
State the external economies of sclae
better transport infrastructure
componet suppliers move closer
r&d fimrs move closer
explain teh better transport infrastructure economy of sclae
new roads, airports, rilawyas built (near you)
BTI reduce costs as a bs therefore cheaper to sell goods if need transport to sell
cheaper to access RM if being transported to you
so TC decrease , bringing down AC
Explain the Component Suppleirs Move Closer EOS
As yoru bs is a huge firm its in their interest to be close to you
therefore cuts down (their) cost of transporting comp/rm to you
therefore TC will decrease reducing AC
Explain R&D firms moving closer
youre a key bs for them
so if they move closer to you , you can use their R&D, improve your technologuy and reduce your costs as a result
causing TC to decrease which will reduce AC
diseconomies of scale
increases in ATC firms ay experience by increasing output in the long run
disecon of sclae happens wehn
firm gets too big
what is the sort of mnemonic to remember disecon of scale
3cs and an m
state the disecon of scale
control
communication
coordination
motivation
all disecon of scale impact on
productivity
as all disecon of scale impact on prod what does this mean
total costs will icnrease faster than quantity therefore pushing up AC
Explain control diseocn
as bs gets larger harder for managment ot control workforce
as so many workers
therefore if workers know manag not looking after them and at what theyre doing
theyll slack off more decreasing prod
therefore quantity suffers
therefore TC increasse faster than q therefore AC increases
explain communication disecon
harder to spread messgaes to company from top - down
or workers got great ideas to improve efficieny of bs but not able to spread msg quick/correct (to those at the top)
takes time and effort along with being a waste of time
impacting prod (msgsc unclear + takes time to hear descison/info whihc is exhausting)
TC rise faster than Q so AC increase
explain coordination disecon
harder as get alrger to maanage and co ord dpt/make sure theyre working in the same/right way for the same end goal
i.e hard for marketing to work alongside finance if not coord properly
therefore prod suffers so costs rise faster than q increasing ac
explain motivation
bs gets larger , more workers
so each indi worker feels less valued (tiny piece in large chess board ) and can be easily replaced (depending on skill lvl )
if owrkers feel this way(not much val to/for comp) mojo is hit therefore prod is hit
total costs rise faster than quantity pushing up AC
