Economies of scale

Question 1

Economies of scale

Answer 1

A reduction in the long run average costs as output increases , because we begin to repay the fixed costs over time

Question 2

Total cost=

Answer 2

Fixed cost(costs that don’t change with output)+ variable output(costs that change with output)

Question 3

Internal economies of scale

Answer 3

Within a businesses’ control, businesses can exploit them

Question 4

Average cost for economies of scale

Answer 4

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)

Question 5

Types of internal economies of scale

Answer 5

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)

Question 6

Diseconomies of scale

Answer 6

An increase in the long run average costs as output increases

Question 7

How unit costs become cheaper in internal economies of scale

Answer 7

Can spread fixed costs over a wide range of output - unit costs become cheaper

Question 8

External economies of scale

Answer 8

Better transport infrastructure
Component suppliers move close
Research and Development Firms move closer

Question 9

Average cost(external economies of scale)

Answer 9

Reducing total cost while output remains the same - this brings down average cost

Question 10

Profit=

Answer 10

Total revenue - total cost

Question 11

Diseconomies of scale

Answer 11

1. Control
2. Communication
3. Coordination
4. 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)

Question 12

Average cost(diseconomies of scale)

Answer 12

Total cost increases more than quantity(average cost increases)

Question 13

Market

Answer 13

A place where buyers and sellers meet to exchange goods for money

Question 14

Four different types of market

Answer 14

1. Perfectly competitive market
   2.Monopoly
   3.Monopolisticly Competitive Market
   4.Oligopoly

Question 15

Perfectly competitive market features

Answer 15

1. Many buyers and sellers(infinite)
2. Homogenous goods(sell an identical good/product): firms are price takers(no ability to set own prices)
3. No barriers to entry/exit
4. Perfect information
5. Firms are all profit maximisers(will produce when marginal cost = marginal revenue)

Question 16

What does it mean the more firms in each market?

Answer 16

The lower the profits for each player

Question 17

Long run

Answer 17

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.

Question 18

What happens if, in a perfectly competitive market, there are supernormal profits to be earned?

Answer 18

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.

Question 19

Which market do consumers prefer?

Answer 19

Consumers prefer a competitive market,which has lower prices than a market without competition(e.g. monopoly- only one firm in the market).

Question 20

Dynamic efficiency

Answer 20

If you’re reinvesting profits for growth

Question 21

Productive efficiency

Answer 21

Using the exact right amounts of factors of production without wasting resources e.g. firm operating at lowest point of average cost curve

Question 22

Allocative efficiency

Answer 22

Are we making the best use of available resources, where price = marginal cost

Question 23

Monopoly

Answer 23

A firm dominating more than 25% of the market share

Question 24

Pure monopoly

Answer 24

One seller/firm dominating 100% of the market

Question 25

Examples of monopolies

Answer 25

Technically Tesco - 27% of market share

Question 26

Barriers to entry/exit used by monopolies

Answer 26

Copyright, aysmmetric information, start up costs

Question 27

In a monopoly, where are you making supernormal profits?

Answer 27

If average revenue is greater than average cost at the equilibrium quantity

Question 28

Are monopolies inefficient?

Answer 28

Yes - resources are wasted, exploitation of customers is how profits are maximised, while choice/output for consumers is restricted

Question 29

Types of static efficiency

Answer 29

1) Allocative efficiency
2) Productive efficiency
3) X-Efficiency: By minimising wastage
These types of efficiency don’t change the size of the business

Question 30

Are monopolies allocatively efficient?

Answer 30

No, not producing when MC= AR, low quality due to lack of competition, quantity should be higher when seeing where allocative efficiency is at market

Question 31

Are monopolies productively efficient

Answer 31

No - they’re not producing at the lowest point of the average cost curve

Question 32

Are monopolies X-efficient?

Answer 32

No- lack of competitive drive, difficult to reduce waste to absolutely minimum

Question 33

Dividends

Answer 33

Profits shareholders are expected to be given

Question 34

Are monopolies dynamically efficient?

Answer 34

We don’t know - don’t know what they’re doing with their long run supernormal profits

Question 35

Why is a perfectly competitive market structure more beneficial than a monopoly?

Answer 35

From the consumers’ point of view, in the long run,they’re only earning normal profits as prices are kept lower. Perfectly competitive markets also use resources more efficiently than monopolies, minimising wastage, which benefits consumers as a result of lower costs.

Question 36

Consequences of monopolies

Answer 36

Result in welfare/deadweight loss - customers unhappy due to high prices and limited choices(resources are being wasted/misused)