Economies and diseconomies of scale

Question 1

FOP short run

Answer 1

At least one FOP is fixed for up to 12 months (usually)

Question 2

FOP long run

Answer 2

All FOP is varied, can increase scale of production by increasing all FOP

Question 3

LRAC

Answer 3

Long run average cost has a shape influenced by economies of scale

Question 4

Economies of scale

Answer 4

The cost advantage of production on a larger scale. Average cost is usually higher if not made in bulk. In the LR, more goods can be made more efficiently so that the average cost per unit decreases due to EoS (lower LRAC). As firms increase in size, they become more efficient as all FOP can be varied.

Question 5

Internal EoS

Answer 5

Most common, involves changes within a firm. Technical, Purchasing, Financial, Law of increased dimension, Marketing/Advertising

Question 6

Technical EoS

Answer 6

Larger firms can have production line methods to make things at a low cost, specialised labourers

Question 7

Purchasing EoS

Answer 7

Larger firms need larger quantities of raw materials and can negotiate discounts while bulk buying

Question 8

Financial EoS

Answer 8

Larger firms can borrow money at a lower interest rate(less risky)

Question 9

Law of increased dimensions EoS

Answer 9

Larger firms can build bigger warehouses and shipping containers which allows more space to store and reduced transport costs

Question 10

Marketing/Advertising EoS

Answer 10

Larger firms have increased brand awareness , cost per product of advertising is lower

Question 11

External EoS

Answer 11

Involves change outside a firm. Larger firms may have local colleges offering necessary qualifications for big employers so training costs are reduced, better infrastructure and supply networks.