Economies and diseconomies of scale pt2

Question 1

Diseconomies of scale

Answer 1

In diseconomies of scale, the LRAC starts to rise with output as a firm expand

Question 2

Reasons for diseconomies of scale-1

Answer 2

Poor communication in a large firm-hard to communicate ideas affecting staff morale, managers lose control, difficult to coordinate

Question 3

Reasons for diseconomies of scale-2

Answer 3

More wastage and loss as firm grows-bigger warehouses means that things may go missing

Question 4

What shifts LRAC?

Answer 4

External EoS shifts LRAC down as it reduces costs at all output levels
External DoS will force it to shift up

Question 5

Returns to scale

Answer 5

Describes the effect on output of increasing all factor inputs

Question 6

Shape of LRAC

Answer 6

The shape of the LRAC curve is due to returns to scale (RTS)

Question 7

Shape of SRAC

Answer 7

The shape of the SRAC curve is due to diminishing returns

Question 8

RTS graph

Answer 8

Increasing RTS=Economies of scale (decreasing costs)-Zone 1
Constant RTS=Constant costs-Zone 2
Decreasing RTS=Diseconomies of scale (increasing costs)-Zone 3

Question 9

Zone 1

Answer 9

Increasing returns to scale means that an increase in all FoP leads to a more than proportional increase in output. E.G. Doubling factors leads to triple the amount of outputs. There is more output produced per unit of input

Question 10

Zone 2

Answer 10

Constant returns to scale means that an increase in all FoP leads to a proportional increase in output. Doubling factors leads to a double amount of output. Costs increase proportionally to output

Question 11

Zone 3

Answer 11

Decreasing returns to scale means that an increase in all FoP leads to a less than proportional increase. Tripling factors leads to a double amount of output, Less output produced per unit of input