Economies and Diseconomies of Scale (3.3.3)

Question 1

What are economies of scale?

Answer 1

As a firm increases its scale of output in the long-run, its LRATC will initially decrease due to the benefits it receives. This will cause increasing returns to scale for the firm

Question 2

What are diseconomies of scale?

Answer 2

As a firm continues increasing its scale of output in the long-run, its LRATC will start to increase at some point. This will cause decreasing returns to scale for the firm

Question 3

What are internal economies of scale?

Answer 3

Advantage that a firm is able to enjoy because of a growth in the firm, independent of anything happening to other firms or the industry in general. Occur as a result of production within the firm.

Question 4

What are the types of internal economies of scale? (6 Types)

Answer 4

1. Financial Economies
2. Managerial Economies
3. Marketing Economies
4. Purchasing Economies
5. Technical Economies
6. Risk-bearing Economies

Question 5

What are Financial Economies as a type of Economy of scale?

Answer 5

Large firms often receive lower interest rates on loans than smaller firms as they are perceived as less risky. A cheaper loan lowers the AC

Question 6

What are Managerial Economies as a type of Economy of scale?

Answer 6

Occurs when large firm can employ specialist managers who are more efficient at certain tasks and this efficiency lowers the AC. Managers in small firms often have to fulfil multiple roles and are less specialised

Question 7

What are Marketing Economies as a type of Economy of scale?

Answer 7

Large firms spread the cost of advertising over a large number of sales and this reduces the AC. They can also reuse marketing materials in different geographic regions which further lowers AC

Question 8

What are Purchasing Economies as a type of Economy of scale?

Answer 8

Occur when large firms buy raw materials in greater volumes and receive a bulk purchase discount which lowers the AC

Question 9

What are Technical Economies as a type of Economy of scale?

Answer 9

Occur as a firm is able to use its machinery at a higher level of capacity due to increased output thereby spreading the cost of the machinery over more units and lowering the AC

Question 10

What are Risk-bearing Economies as a type of Economy of scale?

Answer 10

Occur when a firm is able to spread the risk of failure by increasing its numbers of products i.e. greater product diversification-less failure lowers AC

Question 11

What are external economies of scale?

Answer 11

Occur when there is an increase in the size of the industry in which the firm operates. The firm is able to benefit from lower LRATC generated by factors outside of the firm

Question 12

What are examples of External economies of scale? (4 examples)

Answer 12

1. Geographic cluster
2. Transport Links
3. Skilled labour
4. Favourable legislation

Question 13

What does geographic cluster mean as a source of external economies of scale?

Answer 13

As an industry grows, secondary firms move closer to major manufactures to cut costs and generate more business which lowers the LRATC

Question 14

What does transport links mean as a source of external economies of scale?

Answer 14

Improved transport links develop around growing industries in order to help get people to work and to improve the transport logistics

Question 15

What does Skilled labour mean as a source of external economies of scale?

Answer 15

An increase in skilled labour can lower the cost of skilled labour, thereby decreasing the LRATC. The larger the geographic cluster, the larger the pool of skilled labour

Question 16

What does favourable legislation mean as a source of external economies of scale?

Answer 16

Often generates significant reductions in LRATC as governments support certain industries in order to achieve their wider objectives

Question 17

What are the types of diseconomies of scale? (4 Types)

Answer 17

1. Management Diseconomies
2. Communication Diseconomies
3. Geographical Diseconomies
   4 Cultural Diseconomies

Question 18

What are Management Diseconomies as a type of Diseconomy of scale?

Answer 18

Occur when managers work more in their self interest than in the interest of the firm e.g. become territorial + obstructive thus reducing efficiency and increasing the AC

Question 19

What are Communication Diseconomies as a type of Diseconomy of scale?

Answer 19

Occur when a firm with multiple layers of management and perhaps in multiple geographical locations, struggle to communicate quickly and efficiently leading to slow responses and increased AC

Question 20

What are Geographical Diseconomies as a type of Diseconomy of scale?

Answer 20

Occur when a firm has widespread bases of operations and this leads to logistical and communication challenges which can raise the AC

Question 21

What are Cultural Diseconomies as a type of Diseconomy of scale?

Answer 21

Occur when a firm expands into foreign markets in which workers have very different cultural work/productivity norms which can raise the AC

Question 22

What is the minimum efficient scale?

Answer 22

The lowest cost point on a long-run average total cost (LRATC) curve. It represents the lowest possible cost per unit that a firm in the industry can achieve in the long run.

Question 23

What do EofS, DisEofS + Min Efficient Scale look like on a graph?

Answer 23

Slide 14

Question 24

Between Increasing + decreasing returns to scale and Increasing and diminishing marginal returns which one only happens in the short run and which only happens in the long run?

Answer 24

Increasing + decreasing returns to scale = Long run

Increasing and diminishing marginal returns =Short run