Economies And Diseconomies Of Scale Flashcards
What Are Internal Economies Of Scale?
These are cost savings made by individual firms as they become cost efficient in the long-run.
Economies arise when average costs fall as a firm increases output. The firm moves from a higher to a lower point along the AC curve.
What Are Sources Of Internal Economies Of Scale?
Technical economies
They are cost savings made by firms as they use large capital equipment like oil tankers,
jumbo jets. Firms increases output by using capital equipment to maximum capacity. The
cost of buying and maintaining the equipment is spread over many units of output leading
to a fall in average costs.
Similarly, using large scale capital equipment reduces average costs e.g. transporting oil by
tankers or transporting goods by large containers reduces cost per unit.
▪ Managerial economies
Specialisation and division of labour in large firms increases efficiency and reduces costs
savings. Experts are hired to manage the different departments leading to efficiency and a
fall costs.
▪ Purchasing or bulk-buying economies
Large firms have big purchasing power and influence over suppliers. Through bulk- buying
they can buy inputs cheaply by negotiating big discounts. This reduces their average costs.
Large supermarkets like Walmart and Carrefour use their purchasing power to obtain
goods from suppliers at very low prices
Marketing economies
Large firms can promote their products on TV, in newspapers and on the internet at lower
rates because they can buy large amounts of airtime and space and are hence able to
negotiate for lower rates.
They also save on distribution costs because they ship or transport large volumes of
products. The costs are spread over many nits of output leading to fall in average costs.
▪ Financial economies
Large firms can access finance from banks cheaply (at lower interest rates) because they
are perceived to be less risky borrowers. They also have good assets to offer as collateral
(or security) against loans.
▪ Risk-bearing economies (economies of scope)
They arise when average cost falls as a firm increases output across a wide range of
different products. Large firms produce a variety of products to spread their risks. As a
result they produce many units of output and spread their total cost over a large volume
of output. This reduces their average costs.
▪ Technological economies
Large firms make cost savings through online orders and booking systems. Consumers can
buy goods, insurance, hotel accommodation and flights online. This reduces the number of
workers employed by firms and their fixed costs like rent leading to a fall in LRAC.
What Are Internal Diseconomies Of Scale?
They occur when a firm increases its output beyond the optimum level leading to a rise in long - run average costs.
What Are Sources Of Internal Diseconomies Of Scale?
Management problems due to problems of organizing and coordinating operations of a large firm (managerial diseconomies) leading to inefficiency.
Loss of morale and motivation of the workforce. This may be due to on the due to loss of individual attention as the workforce becomes bigger. This could reduce efficiency and increases costs.
What Are External Economies of Scale?
These are cost savings made by a firm in an industry as it expands (grows). Average costs of individual firms in the industry fall. They are common when the industry is located in one region (localized) e.g. Silicon valley.
What Are Sources Of External Economies Of Scale?
Availability of a pool of skilled labour in the area which reduces recruitment costs
Cheap supplies of raw materials and component parts from specialist producers attracted to the area
Increased access to knowledge (information) and possibility of firms collectively sharing R&D costs
Better infrastructure in the area
Training facilities provided by local authorities or universities
Improvement in technology increasing productivity and reducing unit costs
Lower training costs due to the possibility of poaching trained and experienced workers from rival firms.
What Are External Diseconomies Of Scale?
They occur when costs of individual firms rise as the industry to which they belong grows. They are common when firms are over-concentrated in one area (localized). Individual firms start to compete for resources.
What Are Sources Of External Diseconomies Of Scale?
Land shortage leading to a rise in rent (fixed costs)
Shortage of skilled labour leading to a rise in wages.
Shortage of inputs e.g. raw materials
Traffic congestion which leads to higher distribution costs.
What Are Sources Of External Diseconomies Of Scale?
Land shortage leading to a rise in rent (fixed costs)
Shortage of skilled labour leading to a rise in wages.
Shortage of inputs e.g. raw materials
Traffic congestion which leads to higher distribution costs.
What Are Sources Of External Diseconomies Of Scale?
Land shortage leading to a rise in rent (fixed costs)
Shortage of skilled labour leading to a rise in wages.
Shortage of inputs e.g. raw materials
Traffic congestion which leads to higher distribution costs.
