Economies of Scale

Question 1

What are economies of scale?

Answer 1

Economies of scale occur when long run average costs fall with increasing output.

Question 2

What are internal economies of scale?

Answer 2

Internal economies of scale occur when an individual firm becomes more efficient.

• Specialisation and division of labour
• Bulk buying
• Technical - when a firm benefits from increased scale of production
• Financial economies
• Marketing
• Risk bearing

Question 3

What are external economies of scale?

Answer 3

When the entire industry benefits.

Question 4

What are diseconomies of scale?

Answer 4

This occurs when long run average costs start to rise with increased output.
Therefore, there will be decreasing returns to scale
. As the firm gets bigger it will become more inefficient.

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Question 5

What causes diseconomies of scale?

Answer 5

1. Poor communication - In a large firm with many workers it can be difficult to communicate and there may be high levels of bureaucracy.
2. Alienation. Working in a highly specialised assembly line can be very boring, and therefore workers become de-motivated.
3. Lack of control. When there are a large number of workers,it is easier to escape with not working very hard and productivity could suffer as a result.
4. External diseconomics of scale. When whole industries get too big and suffer issues such as congestion and duplication of routes.

Question 6

What is the minimum efficient scale?

Answer 6

The minimum efficient scale is the minimum point of output necessary to achieve the lowest AC on the LRAC.

Question 7

What is the significance of the MES?

Answer 7

It determines optimal number of firms in the industry.