Economies of Scale

Question 1

Define Economies of Scale

Answer 1

EoS are when LRATC fall as output increases.

Question 2

What is meant by internal economies of scale?

Answer 2

Internal Economies of scale are when long run average total costs fall as the output of the firm increases.

Question 3

What is meant by external economies of scale?

Answer 3

These are when long run average total costs fall as the output of the industry increases.

Question 4

What is meant by the minimum efficiency scale?

Answer 4

This is the lowest output at which long run average total costs are minimised

Question 5

What are the implications of the MES for the size of business?

Answer 5

If the MES is achieved at a very high level of output this suggests that this industry might favour large firms. If the MES is achieved at low levels of output, the there is less scope for economies of scale, so this industry favours smaller firms.

Question 6

What are the implications of the MES for the size of barriers to entry?

Answer 6

If the MES is achieved at a high level of output, them there is scope for large economies of scale, therefore barriers to entry will be high as new firms would have to enter the market at a high level of output inn order to compete on price with the incumbent firms.

Question 7

Name 6 types of internal economies of scale

Answer 7

• Purchasing - buying in bulk
• Technical - fixed cost of machinery can be spread over a larger output when producing on a larger scale.
• Managerial - when specialist managers can be more efficient than workers with more general skills. (only possible with high volumes)
• Marketing - when the fixed costs of marketing can be spread over a larger output, and where bulk buying can take place on marketing space such as billboards.
• Financial - when larger firms are lower to risk to lend to, and hence attract a lower interest rate on loans.
• Risk bearing - when the cost of one part of the business failing can be spread across a larger output.

Question 8

What economies of scale might exist in the car industry?

Answer 8

• Technical due to the machinery used.

- Purchasing due to the volume of goods purchased

Question 9

List 3 diseconomies of scale

Answer 9

• Communication issues as a firm gets to large.
• Coordination issues (logistics and timing)
• Motivation issues (does one employee have much of an impact)

Question 10

List 3 external economies of scale

Answer 10

• Economies of infrastructure lowers AC of production for all firms in industry
• Research and education infrastructure means that the bigger the industry, the more training sessions will be available
• More staff expertise available.