economies and diseconomies of scale (L4)

Question 1

constant returns to scale

Answer 1

% change in output= % change in input

Question 2

increasing returns to scale

Answer 2

% change in ouput > % change in input

Question 3

decreasing returns to scale

Answer 3

% change in ouput < % change in input

Question 4

shape of LRAC curve

Answer 4

bucket/stretched U

Question 5

economies of scale

Answer 5

decreases in average costs of production over the long run as firm increases inputs

Question 6

types of economies of scale

Answer 6

internal (in the businesses control)

external

Question 7

internal economies of scale

Answer 7

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Risk bearing
Financial
Managerial
Technical
Marketing
Purchasing

Question 8

technical economies of scale

Answer 8

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.

Question 9

managerial economies of scale

Answer 9

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

Question 10

diseconomies of scale

Answer 10

average costs rise

Question 11

marketing economies of scale

Answer 11

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.

Question 12

financial economies of scale

Answer 12

a large firm with strong reputation may be able to finance expansion on more favourable terms than a small firm for example

Question 13

purchasing economies of scale

Answer 13

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

Question 14

risk bearing economies of scale

Answer 14

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.

Question 15

why are internal factors economies of scale beneficial

Answer 15

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

Question 16

external factors of economies of scale

Answer 16

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

Question 17

what causes diseconomies of scale

Answer 17

3 Cs and M

control, communication, lacking motivation cause total cost to increase way more than quantity

Question 18

why would co-ordination and monitoring cause diseconomies of scale

Answer 18

management runs into difficulties of coordination etc which causes inefficiency causing average costs to expand

Question 19

why would motivation cause diseconomies of scale

Answer 19

when firms get bigger, it’s harder for workers to feel important so they care less since they feel more replaceable