Economies of scale/Diversification

Question 1

What are the advantages and disadvantages of increasing production capacity?

Answer 1

Advantages: increased efficiency, bargaining power, learning economies, greater technological efficiency and risk diversification.
Disadvantages: overproduction, threat of exclusivity, trend dependency of customers, excessive bureaucracy and conflicts.

Question 2

Economies of scale

Answer 2

the cost advantage of a company when it increases its production ( if the quantity goes up, the per-unit costs and the average unitary cost will go down)

Question 3

Diseconomies of scale

Answer 3

the point at which further increases of production will lead to increases in average costs

Question 4

What types of economies of scale exist?

Answer 4

Short-run ( reduction in average costs due to production capacity increasing) and Long-run (reduction in average costs due to technological innovation which lowers VC)

Question 5

What are the sources of economies of scale?

Answer 5

Indivisibility, specialisation, bargaining power, learning economies, greater technological efficiency, geometric properties of containers and risk diversification

Question 6

What are the sources of diseconomies of scale?

Answer 6

Coordination and administration costs, excessive bureaucratic organization, lack of incentives, misallocation of resources within the firm, limits to resource availability, “conflicting out”

Question 7

Fixed - cost absorption

Answer 7

Reductions in AUC obtained by distributing fixed costs across larger units of production outputs

Question 8

What are the determinants of size?

Answer 8

economies of scale, economies of scope, learning curve