Economies and Diseconomies of Scale

Question 1

what is economies of scale

Answer 1

reduction in LRAC as output increases

Question 2

what are the gorups of EOS

Answer 2

Internal
External

Question 3

What is internal economies of scale

Answer 3

reductions in LRATC arising from gorwht of the firm

Question 4

IEOS are withn

Answer 4

a bs control

Question 5

Mnemonic for remebering facors affecting EOS

Answer 5

Really
Fun
Mums
Try
Making
Pies

Question 6

we need to link teh factors of economies of sclae to

Answer 6

lowering average costs

Question 7

give the overall idea of IEOS

Answer 7

TC rise in each case
but
quantity will be rising much faster
therefore
average costs will be decreasing as a result

Question 8

Explain Managerial EOS (1) acquiriing managers and how they make changes to costs/profits

Answer 8

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

Question 9

Explain Managerial EOS (2) how do average costs fall and TC rise

Answer 9

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

Question 10

What are the two ways technical EOS can work

Answer 10

bringing in specialsit machinery
employing more workers

Question 11

explain TEOS with specialsit machinery

Answer 11

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

Question 12

EXPLAIN THE OTHER teos

Answer 12

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

Question 13

Explain Purchasing Economies of Scale

Answer 13

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

Question 14

Explain Marketing EOS

Answer 14

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

Question 15

other way to say

tc rise but q rises faster

Answer 15

tc rises slower than q

Question 16

Explain financial eos

Answer 16

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

Question 17

explain Risk Bearing Economies of Scale

Answer 17

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

Question 18

What is External EOS

Answer 18

reductions in LRATC arising from growth of the industry in whihc a firm operates

Question 19

explain where EEOS occcur

Answer 19

dont ocur within the business so outside of the bs control

but within the indsutry

Question 20

as EEOS occcur outside of control of firm but within the industry what does it mean for the busienss

Answer 20

beenfit from EEos without doing anything

(but also suffer)

Question 21

EEOS occur as a business grows therefore

Answer 21

businessgain these benefits as they get larger

Question 22

State the external economies of sclae

Answer 22

better transport infrastructure
componet suppliers move closer
r&d fimrs move closer

Question 23

explain teh better transport infrastructure economy of sclae

Answer 23

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

Question 24

Explain the Component Suppleirs Move Closer EOS

Answer 24

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

Question 25

Explain R&D firms moving closer

Answer 25

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

Question 26

diseconomies of scale

Answer 26

increases in ATC firms ay experience by increasing output in the long run

Question 27

disecon of sclae happens wehn

Answer 27

firm gets too big

Question 28

what is the sort of mnemonic to remember disecon of scale

Answer 28

3cs and an m

Question 29

state the disecon of scale

Answer 29

control
communication
coordination

motivation

Question 30

all disecon of scale impact on

Answer 30

productivity

Question 31

as all disecon of scale impact on prod what does this mean

Answer 31

total costs will icnrease faster than quantity therefore pushing up AC

Question 32

Explain control diseocn

Answer 32

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

Question 33

explain communication disecon

Answer 33

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

Question 34

explain coordination disecon

Answer 34

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

Question 35

explain motivation

Answer 35

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