Economies of scale Flashcards
define EoS
a reduction in LRAC as output increases
define internal EOS
refer to the cost advantages a firm can achieve as a result of its own growth and expansion
list EOS
- risk bearing
- financial
- managerial
- technical
- marketing
- purchasing
impact of managerial
- as business grows, can hire more managers to increase productivity of workers= bring specialist skills to ensure output increases faster than TC
impact of technical
- as business grows, can afford specialist machinery= more productive use of FOP= can train workers to specialise with these machines= more productive
impact of purchasing
- as firms grows, able to buy raw materials in bulk= negotiate unit discounts= spread costs over wider range of output
impact of marketing
- as firm grows, can buy advertising in bulk= better unit rates= decrease brand loyalty for new firms= more customers
impact of financial
- as firm grows, can negotiate low rates of interest on loans= more reliable as proven profit= less risky investment
impact of risk bearing
as firm grows, can spread OC over larger range of output
Define external EOS
cost advantages that result from the growth and expansion of an entire industry or cluster of firms in a particular geographic area
= within same industry but outside of firm’s control
impact of better transport list external EOS
- better transport infrastructure
= more roads and ports= low costs to access and move FOP like raw materials - component supplies move closer to firm
- R and D firms move closer= use R and D to improve firm’s tech
define diseconomies of scale
occur when a business grows so large that the costs per unit increase.
As output rises, it is not inevitable that unit costs will fall. Sometimes a business can get too big
impacts of DES
- harder for managers to control work force as firm gets bigger= more workers to control= less productive = TC will rise faster than Q
- harder to spread messages and communicate in a large firm= more layers of workers to grad messages through
- coordination in diff parts of business becomes harder
- due to more workers, each individual worker feels less valued= feel replaceable= less motivation and less productive= increase TC and decrease Q
