Economies of Scale and diseconomies of scale

Question 1

What are the two types of economies of scale?

Answer 1

Internal and external

Question 2

Define internal economies of scale?

Answer 2

-When the individual firm benefits from economies of scale

Question 3

Define external economies of scale?

Answer 3

-When the entire industry goes so all firms benefit

Question 4

Define economies of scale?

Answer 4

reduction in the long-run AC as output increases

Question 5

How can you remember factors influencing internal economies of scale?

Answer 5

Really-risk bearing
Fun-financial
Mum-managerial
Try-technical
Making-marketing
Pies-purchasing

Question 6

What is the point of risk bearing?

Answer 6

If the firm has a diverse product there’s less failure, e.g Asda sells clothes and food products if the clothes section fails then Asda will still be at advantage because of food products.

Question 7

What is the impact of financial?

Answer 7

The more output produced the bigger the firm gets- Banks are willing to lend money at lower interest rates and vice-versa it will lower Long-run AC and if the firm is small they will have to borrow higher interest rates- long-run AC will rise.

Question 8

What is the impact of Marketing?

Answer 8

The bigger the firm the more it can spread its marketing budget over a large output so AC will go down. It gives them the power to negotiate lower prices e.g billboards advertising it gives them buying power.

Question 9

What is the impact of technical?

Answer 9

It is relevant to transport markets where tech is key so buying specialist machines to do efficient tasks. Moreover, specialization of division of labor/law of increased dimension.

Question 10

What is the impact of managerial?

Answer 10

If the firm can employ specialist manager they can improve productivity of labour within these departments and run at the most efficient level.

Question 11

What is the impact of purchasing?

Answer 11

the bigger the firm the more likely they are willing to negotiate prices on raw materials like buying in bulk, the size of the firm is important it gives suppliers a hint that they are trust-worthy.

Question 12

Can firms also suffer from diseconomies of scale?

Answer 12

yes and it means when the long-run AC rise as output increases

Question 13

What are the problems faced with internal economies of scale?

Answer 13

Coordination
control
communication
motivation

Question 14

What is the problem with control in a large firm?

Answer 14

As the firm gets larger it will be harder to control from the top which can lead to AC rising

Question 15

What is the problem faced with coordination in a large firm?

Answer 15

it can be time-consuming and expensive if a worker has great ideas in a large firm it can be hard to spread these thoughts so there has to be financial stability for the creation of this new product.

Question 15

What is the problem faced with coordination in a large firm?

Answer 15

it can be time consuming and expensive if a worker has great ideas in a large firm it can be hard to spread these thoughts so there has to be financial stability for the creation of this new product.

Question 16

What is the problem faced with communication?

Answer 16

How can managers communicate with workers efficiently?

Question 17

What is the problem faced with motivation?

Answer 17

imagine you are a worker among thousands of workers doing the same job would you still feel valued, that’s why workers feel de-motivated and as a result long-run AC rise.

Question 18

How does the level of production help whether the firm is facing diseconomies of scale or not?

Answer 18

Well in a LRAC cost curve, it depends on the level of production so if if the production is on the left side the firm will experience economies of scale.