Economies of Scale Flashcards
Economies of Scale
Reduction in long run average costs as output increases (decreasing section on the diagram)
Internal EoS
Businesses can control and exploit them as they get larger.
Risk Bearing
Risk is a cost that is priced for, but this can be spread over a larger range of output.
Financial
Businesses can negotiate a lower rate of interest as the business is trusted and reputable.
Managerial
Firms can employ specialist managers to boost productivity within workers and use their own specialist skills.
Technical
Bringing in specialist equipment. Employ more specialist workers.
Marketing
They can bulk buy advertising costs eg multiple billboards.
Purchasing
When a firm can buy raw materials at a unit discount for bulk buys. This means they can spread costs over larger range of units.
Basic Rule of Internal EoS
Cost goes up slightly, quantity rises much faster hence AC goes down.
External EoS
Occur outside of the business, but within the industry of the industry
Better Transport Infrastructure
Have to spend less money on logistical costs,
Suppliers move closer towards you
Less transport costs for supplier so they can sell slightly lower prices.
R&D firms move closer to you
Easier access to improved capital
Basic rule for External EoS
TC goes down, Quantity stays same
DEoS
Increase in LRAC as output increases.
