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
internal economies of scale: define risk bearing economies of scale
Diversifying into new ventures and producing more
internal economies of scale: why is risk bearing economies good
when one venture goes bankrupt, your costs will be minimised as you would have other ventures = wouldn’t not be a big impact
internal economies of scale: how do large firms vs small firms benefit from risk bearing economies of scale
- Bigger firms can exploit risk bearing economies of scale using their profits to diversify into new areas = reduces cost of failure in one sector
- Smaller firms do not have enough profit to diversify, so the cost of failure is high
define internal diseconomies of scale
when an increase in output increases LRAC
when can internal diseconomies of scale occur
when a firm expands too much
state the three main reasons for internal diseconomies of scale
- Alienation
- Bureaucracy
- Communication
internal diseconomies of scale: define alienation
when workers are working in a way where by they are separated from their coworkers
internal diseconomies of scale: state how alienate causes internal diseconomies of scale
decreases motivation. As motivation falls productivity falls, and long run average costs rise
internal diseconomies of scale: define Bureaucracy
all the paperwork mangers, filing and securities that a firm has to pay for when it gets really big
internal diseconomies of scale: state how Bureaucracy causes internal diseconomies of scale
as firms expamd, they will have to hire more managers to supervise staff, fill out more forms to keep track of people’s work and then employ secretaries to help with all the filing
- Spending on bureaucracy is expensive and increases LRAC
internal diseconomies of scale: state how Communication causes internal diseconomies of scale
- when firms get larger, communication can slow down
- Slow communication decreases productivity and increases LRAC
define the minimum efficient scale
the quantity where a firm first reaches their lowest average cost
define External economies of scale
when a firm’s long run average costs fall, as industryoutput increases.
what happens to the LRAC curve when there are external economies of scale an why
LRAC decreases because for whatever quantity you produce, external economies of scale will always reduce LRAC (will make it cheaper to produce at all quantities)
state the difference between internal and external economies of scale
- internal economies = firms own output gets bigger
vs - external economies = an entire industry gets bigger/ expands
What does a firms L- shaped LRAC curve means
Firms are not experiencing LRAC is not increasing = not experiencing decreasing return to scale and diseconomies
Why does the L- shaped LRAC curve happen
Because the business is being handled well = cutting out diseconomies (ABC)
