Economies of scale Flashcards
Economies of scale
A reduction in the long run average costs as output increases , because we begin to repay the fixed costs over time
Total cost=
Fixed cost(costs that don’t change with output)+ variable output(costs that change with output)
Internal economies of scale
Within a businesses’ control, businesses can exploit them
Average cost for economies of scale
Total cost/quantity(if quantity increases faster than total cost, average cost will go down, producing more units at a lower cost meaning average unit costs drop, until average costs reach their lowest points)
Types of internal economies of scale
Risk Bearing(how much risk the business will take on)
Financial - how much money the business will spend(as a business is larger, they can negotiate lower rates of interest)
Management of businesses - as a firm gets larger, specialist managers and workers are brought in to improve productivity,meaning quantity will rise faster than total cost
Technical - specialist machinery/technology skills can improve productivity
Marketing e.g. bulk buying advertising(purchasing a large number of advertising at once) can negotiate better unit rates of advertising and spread advertising costs over a wider range of output
Purchasing - buying raw materials, can negotiate unit discounts(quantity rises in company faster than costs)
Diseconomies of scale
An increase in the long run average costs as output increases
How unit costs become cheaper in internal economies of scale
Can spread fixed costs over a wide range of output - unit costs become cheaper
External economies of scale
Better transport infrastructure
Component suppliers move close
Research and Development Firms move closer
Average cost(external economies of scale)
Reducing total cost while output remains the same - this brings down average cost
Profit=
Total revenue - total cost
Diseconomies of scale
- Control
- Communication
- Coordination
- Motivation
All more difficult as organisations are bigger and there are lots of costly businesses around the country(price of unit starts to go up)
Average cost(diseconomies of scale)
Total cost increases more than quantity(average cost increases)
Market
A place where buyers and sellers meet to exchange goods for money
Four different types of market
- Perfectly competitive market
2.Monopoly
3.Monopolisticly Competitive Market
4.Oligopoly
Perfectly competitive market features
- Many buyers and sellers(infinite)
- Homogenous goods(sell an identical good/product): firms are price takers(no ability to set own prices)
- No barriers to entry/exit
- Perfect information
- Firms are all profit maximisers(will produce when marginal cost = marginal revenue)
What does it mean the more firms in each market?
The lower the profits for each player
Long run
When normal profit is being made. Firms in a perfectly competitive market can profit maximise in the short run(to make supernormal profits), but in the long run, firms can only gain normal profits.
What happens if, in a perfectly competitive market, there are supernormal profits to be earned?
New firms are attracted to markets, so these profits get competed away, therefore in the long run, everyone just earns normal profit. Here, the average cost curve will move up and touch the marginal cost curve(all supernormal profits are taken away and normal profit is left at the end). This is also because, as other firms enter the market, the supply curve will shift to the right and the price will fall.
Which market do consumers prefer?
Consumers prefer a competitive market,which has lower prices than a market without competition(e.g. monopoly- only one firm in the market).
Dynamic efficiency
If you’re reinvesting profits for growth
Productive efficiency
Using the exact right amounts of factors of production without wasting resources e.g. firm operating at lowest point of average cost curve
Allocative efficiency
Are we making the best use of available resources, where price = marginal cost
Monopoly
A firm dominating more than 25% of the market share
Pure monopoly
One seller/firm dominating 100% of the market