Long Run Costs And Economies Of Scale

Question 1

What is the long run

Answer 1

The long run refers to the period where all factors of production are variable
- can expand scale of production by increasing FOP

Question 2

Draw the LRAC CURVE

Answer 2

U shape

Question 3

What explains the LRAC curve

Answer 3

Economies of scale and returns to scale

Question 4

What are increasing returns to scale

Answer 4

Percentage change in output is more than % change in inputs

Question 5

What are constant returns to scale

Answer 5

% chance in output = % change in inputs

Question 6

What are decreasing returns to scale

Answer 6

% change in output is less than % change in inputs

Question 7

What can explain increasing returns to scale

Answer 7

Economies of scale

Question 8

What are the two types of EOS

Answer 8

Internal and external EOS

Question 9

What are internal economies of scale

Answer 9

• internal economies of scale is when only the firm benefits from economies of scale

Question 10

What are external economies of scale

Answer 10

External economies of scale is when the whole industry grows so firms benefit

Question 11

What are the internal economies of scale

Answer 11

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- risk bearing
- Financial
- marketing
- technical
- managerial
- purchasing

Question 12

What are risk bearing economies of scale

Answer 12

As a firm becomes larger and increases output the can diversify which leads to less risk in a recession and they have other parts to fall back on

Question 13

What are financial economies of scale

Answer 13

• as a firm increases output, the firm also grows this makes banks see them more as a reputable borrower and will offer higher loans at lower interest rates -> lower LRAC

Question 14

Marketing economies of scale

Answer 14

• as the amount of output increases the marketing budget is spread out over a larger amount of output so average cost of marketing is lower
• repeatable and bugger firms can also negotiate lower prices

Question 15

What are technical economies of scale

Answer 15

• bigger firms have access to more advanced technical forms of capital which help increase efficiency and lower costs

Question 16

What are managerial economies of scale

Answer 16

• managerial economies of scale is that bigger firms have access to more established and specialist managers which can help increase productivity of the frim, increasing efficient and lowering costs

Question 17

Purchasing economies of scale

Answer 17

Bugger firms are buying more and can negotiate better deals as suppliers know the firm will come back as they have a better reputation
- can also bulk buy which will lower costs

Question 18

External economies fo scale

Answer 18

External economies of scale is when the industry grows as a who,w and all firms benefit

Question 19

Examples of external economies of scale

Answer 19

• transportation links due to clustering better roads and links
• suppliers may move toward the large firms makes it cheaper to buy supplies
• r&d firms may move closer -> new innovation better tech and more efficient
• labour move closer -> silicone valley

Question 20

What are diseconomies fo scale

Answer 20

Diseconomies of scale is when a firm grows and increases output past a certain point which leads to average costs rising

Question 21

What causes disecomies of scale

Answer 21

• control -> harder to measure productivity when the firm is bigger
• communication -> more people people feel more alienated leading them to lose motivation
• co ordination -> harder to co ordinate business operations with more people and output