Economies of scale

Question 1

Internal EoS

Answer 1

Lower LRAC resulting from increase in the size of firm in LR.
Divide into:
1: Plant level
2: Multi plant level
3: Firm-level scale economies

Question 2

Plant level EoS

Answer 2

EoS that occur at the level of a single plant
Technical Eos - combine inputs in a technically more efficient way.
Managerial EoS - Group a large number of establishments under one manager. Allows increased managerial specialisation eg. employment of specialist managers.

Question 3

Examples Technical EoS

Answer 3

Indivisibilities - certain minimum size below which they cannot operate efficiently.
Spread R&D costs

Question 4

Multi-plant EoS

Answer 4

LRAC fall as a result of operating more than one plant.

Question 5

Firm-level EoS

Answer 5

Arise from firm being large, rather than operating a single big plant.
Includes marketing, financial and risk-bearing economies.

Question 6

Example of firm level EoS

Answer 6

Marketing economies: Bulk buying and bulk marketing.

Financial: Borrow from banks at lower rate of interest.

Risk bearing: Large firms less exposed to risk as risks can be grouped or spread.

Question 7

Learning effects

Answer 7

Associated with a change in firms operations.

Question 8

Economies of scope

Answer 8

Lowering average costs from producing two or more distinct goods

Question 9

External economies of scale

Answer 9

Unit production costs fall because of growth of the scale of industry, rather than from growth of the firm itself.

Question 10

Mergers

Answer 10

These internalise external economies of scale.

Question 11

Economies of concentration

Answer 11

Locate close together, gain mutual advantages eg. transport.

Question 12

Economies of information

Answer 12

Research and provide information of which all can benefit.

Question 13

Economies of disintegration

Answer 13

Vertically linked production processes can be provided more efficiently by independent specialist firms. eg. indivisibilities.

Question 14

Internal diseconomies of scale

Answer 14

higher LRAC resulting from increase in size or scale of firm in LR
eg. managerial DoS = communication failure between many layers of management eg. top managers to ordinary production workers.

Question 15

External DoS

Answer 15

higher LRAC resulting from growth of industry of which the firm is a part of
eg. negative cluster effect - close proximity lead to road congestion and pollution, which each firm dumps on its market co-members.
Geographical proximity - lead to labour shortages caused by industry firms competing for labour, and higher resulting wage costs.

Question 16

Do not confuse

Answer 16

Internal and external growth with internal and external sources of finance which fund a firms growth.

Question 17

Internal financed growth

Answer 17

Involves ploughing back profit, where as external finance may be raised by borrowing from banks or selling a new share issue on the capital market.
However a new share may render a public company vulnerable to a hostile takeover bid.

Question 18

Trade off facing public companies

Answer 18

Between control and maximising capital raising.