Economies of scale

Question 1

What is economies of scale

Answer 1

When average cost decreases as output increases

Question 2

What are the different types of internal economies of scale and summarise each of them

Answer 2

1.Purchasing (when bulk-buying reduce average cost)

2.Technical (when firms invest in specialist capital to increase productivity and decrease LRAC)

3.Managerial (when firms hire specialist managers to increase productivity and decrease LRAC)

4.Marketing (when firms spread their marketing costs over the many units they sell to reduce LRAC

5.Financial (as firms get bigger,they make more sales and profit so they become less risky to lend to which means banks will offer lower interest rates,reducing repyments costs,reducing LRAC)

6.Risk-bearing (when big firms can use their profits to diversify their business into new areas reducing the cost of failure in one sector)

Question 3

What are the reasons for internal diseconomies of scale?

Answer 3

Alienation-when workers are alienated from their co workers,decreasing motivation,decreasing productivity and increase LRAC

Bureaucracy-the paperwork,managers and secretaries that firms have to pay for when it gets really big

Communication-when firms get too big communication can slow down,decreasing productivity,increasing LRAC

Question 4

What is the minimum efficient scale

Answer 4

Where the firm FIRST reaches its lowest LRAC

Question 5

What is external economies of scale?

Answer 5

When LRAC decreases,as an industry’s output increases