Economies/Diseconomies of scale

Question 1

Economies of scale

Answer 1

the unit cost advantages of large scale production resulting in lower unit costs over a range of output

Question 2

examples of internal economies of scale

Answer 2

technical economies
purchasing economies
managerial economies
financial economies
risk-bearing economies

Question 3

minimum efficient scale

Answer 3

where internal economies of scale have been fully exploited. this corresponds to the lowest point on the firm’s LRAC

Question 4

if MES is low…

Answer 4

(diseconomies of scale occur at a lower level of output) the market is likely to be competitive or contestable, and consist of small firms. eg hairdressers, cafes

Question 5

If MES is high…

Answer 5

domination of a large business eg. natural monopoly

Question 6

external economies of scale

Answer 6

expansion of the industry of which the firm is a member. occur outside of a firm but within an industry.

Question 7

examples of external economies of scale

Answer 7

-university research departments helping to fund research
-transport networks lower logistics costs
-relocation of suppliers to the centre of production
-influx of human capital

Question 8

agglomeration economies

Answer 8

when businesses in similar industries cluster together and attract an influx of skilled talent which then provides human capital to expand

Question 9

diseconomies of scale

Answer 9

a rise in a firms long run average costs of production. they result from a business expanding beyond optimum size and losing productive efficiency.

Question 10

causes of diseconomies of scale

Answer 10

-compliance (high regulatory costs for bigger businesses)
-office politics/industrial relations
-risk aversion among salaried staff
-waste/inefficiency at large organisations
-cooperation (workers in large firms may develop a sense of alienation or loss of morale)
-negative effects of internal politics

Question 11

consequences of diseconomies of scale:

Answer 11

-a business has moved beyond their optimum size
-businesses are suffering from productive inefficiency
-higher unit costs will reduce total profits
-businesses may have to charge higher prices in order to cover their increased costs
-lost competitiveness could lead to declining market share and also a fall in their share price