Economies & Diseconomies of Scale

Question 1

Diseconomies of Scale

3 Reasons

Answer 1

When a firm becomes less efficient (LRAC rise) due to an increase in scale of production

3 Reasons -

• Can suffer from communication problems
• Morale can be low in large firms as workers feel disconnected from those above them
• Inefficiencies are harder to monitor, it is v obvious in
  small firms if somebody is working inefficiently

Question 2

External Economies of Scale

Answer 2

The benefits a whole industry can expect if that industry is growing

e.g. As the industry grows, there is a growing pool of labour with the appropriate skills

Question 3

Economies of Scope

Answer 3

When it is cheaper to produce a range of products rather than specialise in a limited number

e.g. Amazon & Hypermarkets

Question 4

Constant Returns to Scale

Answer 4

Constant returns to scale occur when increasing the number of inputs leads to an equivalent increase in the output.

Question 5

LRAC & SRAC Diagram (u)

Answer 5

u

One large LRAC curve (smiley face) with 5 SRAC’s along it