Economies And Diseconomies Of Scale

Question 1

What is the long run

Answer 1

All FoP are variable

Question 2

Explain shape of long run diagram (2+)

Answer 2

Long run costs fall as output increases = EoS are noticed
However the firm will reach a point where their growth leads to long run costs rising = DoS

Question 3

Where is optimum level of production (2)

Answer 3

Productive efficiency occurs at the lowest average cost
Bottom of the curve = minimum efficient scale of production

Question 4

When do EoS occur (2)

Answer 4

When an increase in scale of production causes cost per unit to fall
This because = the fixed costs can be spread over a large amount of output

Question 5

Types of EoS (4)

Answer 5

Technical
Managerial
Purchasing and marketing
Financial

Question 6

What is technical economies (3)

Answer 6

Arise from production process
Better equipment = increase output
Larger plant size = usually more efficient

Question 7

What is managerial economies

Answer 7

Employing specialist staff = greater efficiency + lower costs

Question 8

What is purchasing and marketing economies (2+)

Answer 8

Firm can buy materials in bulk = secure lower prices
The cost of marketing can also be spread over a larger output = reducing the cost of marketing per unit

Question 9

What is financial economies

Answer 9

Smaller firms are usually charged a larger interest rate because they are more risky to banks than large firms

Question 10

When do diseconomies of scale occur (2)

Answer 10

When an increase in the scale of production = cost per unit to rise
This is because had to add to fixed costs so higher fixed cost amount = shared over the units of output

Question 11

What a the diseconomies of scale (3)

Answer 11

Management
Geographical
No spare capacity

Question 12

What is management DoS

Answer 12

The larger the firm = the harder it is to manage each outlet effectively and efficiently

Question 13

What is geographical - DoS

Answer 13

When the firm is larger + sells more = longer distance taken to transport goods

Question 14

O spare capacity problem - DoS

Answer 14

Firms are too large they need to purchase additional warehouse spaces

Question 15

What are external economies of scale (4)

Answer 15

Training of workers provided by gov in the industry that you are operating in
Improved infrastructure provided by gov = firms seeing a fall in their transport costs
Lower regulations/less rules to follow
The industry is larger/the market is larger

Question 16

The LRAC curve (5)

Answer 16

It’s a boundary
Represents the minimum level of average costs attainable at any given level of output
Points below the LRAC are unattainable
Points above the LRAC could be achieved but the firm would not be working efficiently
Movements along the LRAC are caused by an increase in output which leads to a fall in costs

Question 17

What causes a shift in LRAC

Answer 17

External EoS

Question 18

Relationship between LRAC and SRAC (3)

Answer 18

SR = at first costs fall + then rise due to diminishing returns
LR = costs change due to economies and diseconomies of scale
The LRAC curve contains all the SRAC curves at every single output level the firm may operate at