economies and diseconomies of scale (L4) Flashcards
constant returns to scale
% change in output= % change in input
increasing returns to scale
% change in ouput > % change in input
decreasing returns to scale
% change in ouput < % change in input
shape of LRAC curve
bucket/stretched U
economies of scale
decreases in average costs of production over the long run as firm increases inputs
types of economies of scale
internal (in the businesses control)
external
internal economies of scale
Really Fun Mums Try Making Pies Risk bearing Financial Managerial Technical Marketing Purchasing
technical economies of scale
technology can help increase efficiency of production, more storage means more can be produced. Some capital equipment can’t be used on a small scale (indivisibilities)/ there are high overhead expenditures (factories cost the same no matter how much output) or producing at a larger scale provides a competitive advantage.
managerial economies of scale
specialist managers gain expertise and experience so can make better decisions reducing management cost per unit. when the company gets too big, managers find it difficult which can cause diseconomies of scale
diseconomies of scale
average costs rise
marketing economies of scale
adverts are usually a fixed cost (spread over more units) so cost is lower + brand awareness means consumers trust bigger brands more so they don’t need to advertise as much.
financial economies of scale
a large firm with strong reputation may be able to finance expansion on more favourable terms than a small firm for example
purchasing economies of scale
they’d need to buy in bulk to produce at a large scale, so would be able to buy raw materials/energy/transport services at a cheaper price
risk bearing economies of scale
larger firms can diversify products so are more able to take risks. even if a product is unsuccessful, the other products make up for it.
why are internal factors economies of scale beneficial
even as total cost increases, quantity increases at a faster rate as productivity rises so its spread over a wider range of output making the average cost fall
external factors of economies of scale
better transport infrastructure (bigger ships etc carry more)
component suppliers move closer
research and development firms move close too
these lower total cost even if quantity doesn’t change
what causes diseconomies of scale
3 Cs and M
control, communication, lacking motivation cause total cost to increase way more than quantity
why would co-ordination and monitoring cause diseconomies of scale
management runs into difficulties of coordination etc which causes inefficiency causing average costs to expand
why would motivation cause diseconomies of scale
when firms get bigger, it’s harder for workers to feel important so they care less since they feel more replaceable
