Economies and diseconomies of scale Flashcards
define internal economies of scale
when long run average cost falls, as a firm expand
why do internal economies of scale only apply to the long run average costs?
it’s onlyin the long run when firms can expand enough to take advantage of economies of scale.
state the 6 types of internal economies of scale
(Richard’s Mum Flies Past The Moon)
- Purchasing economies
- Technical economies
- Managerial economies
- Marketing economies
- Financial economies
- Risk-breaking economies
internal economies of scale: define purchasing economies
when firms expand to make bigger purchases, they can negotiate lower prices/reduce LRAC
internal economies of scale: how do larger firms benefit from purchasing economies compared to smaller firms and state why
- small firms = will be more expensive to buy factors of production/ raw materials
- larger firms = will be cheaper to buy factors of production/ raw materials
why?
Because larger firms are able to negotiate lower prices/ bulk buy. Suppliers need big orders to stay a float and so firms may demand discount for orders (assuming they will make profit) and suppliers will have no choice but to accept - otherwise they may risk loosing a big order
internal economies of scale: within purchasing economies how does bulk buying help firms
Bulk buying reduces a firms cost
- More bulk buying mean firms are able to negotiate lower prices
- As firms expand they can bulk buy in bigger volumes, reducing LRAC
internal economies of scale: define Technical economies
when big firms invest in specialist capital, increasing a firms productivity and decreasing their LRAC
internal economies of scale: how do large firms vs small firms benefit from technical economies of scale
- Big firms can afford and justify spending on specialist capital because they are producing enough output to profit on their investment
- But for small firms producing only are goods, investing in specialist equipment would be bad as they will never sell enough units to cover the cost of investing (too costly).
internal economies of scale: what has to take place for technical economies of scale of occur
firms need to scale up and expand = they can exploit technical economies of scale
internal economies of scale: define managerial economies of scale
specialist staff/ machinery, each of which are skilled and efficient in their field increases productivity - LRAC will decrease
internal economies of scale: how do large firms vs small firms benefit from managerial economies of scale
- Small firms cannot afford specialist staff as it is too expensive = produce only afew units
- Larger firms can exploit managerial economies of scale - can afford
internal economies of scale: define marketing economies of scale
when big firms spread their marketing costs across many units = This decreases their LRAC
internal economies of scale: how do large firms vs small firms benefit from marketing economies of scale
- a large firm can use marketing economies spread their marketing cost over multiple units they sell to reduce LRAC
- A small company would go bankrupt trying these marketing strategies
internal economies of scale: define financial economies of scale and state what would happen to the interest rate when high
when bigger firms are less risky and so can secure cheaper loans, reducing their LRAC
- The higher the risk, the higher the interest rate would be for a bank to lend
internal economies of scale: how do large firms vs small firms benefit from financial economies of scale
- bigger firms = banks are willing to lend at lower interest rates, because the high sales/ large profits = the business was deemed as less risky = banks are able to offer lower interest rates
- small firms who are out staring out = much riskier
