Economies Of Scale

Question 1

Define internal economies of scale

Answer 1

Reduction in cost due to changes in production techniques

Question 2

What are examples of technical economies of scale

Answer 2

Indivisibilties —> machine used when levels of output needed are high, when low labour is used
Division of labour —> wage costs rise but output increases more than proportionately
Principle of increased dimensions —> capacity of a container increases more than proportionately to the quantity of material used to build it

Question 3

What are examples of managerial economies

Answer 3

Specialist managers —> training can be more extensive therefore employees are more efficient and output will increase proportionately more than costs

Question 4

What are examples of marketing economies

Answer 4

Bulk buying —> discounts given with larger orders as suppliers experience lower costs in dealing with a few bulk orders
Product development —> marketing and R&D are more successful the larger the firm is as it can support their divisions more improving productivity

Question 5

Define external economies of scale

Answer 5

Sources of cost reduction outside the control of the firm and arise due to events in the industry which the firm operates

Question 6

Examples of managerial diseconomies

Answer 6

Loss of co-ordination —> larger firms have problems with organisation leading to costly mistakes
Excessive bureaucracy —> large firms tend to have more rules and regulations leading to higher administration and staffing costs
X-inefficiency —> slack that exists when managers do not strive to keep costs as low as possible/lack the knowledge to do so

Question 7

What are examples of external diseconomies of scale

Answer 7

Increase in factor prices (minimum wages, oil, gas)

Increase in indirect tax

Question 8

When is total revenue maximised

Answer 8

MR = 0
PED = -1