Long run theory of costs Flashcards
1
Q
Long run avg cost
A
- min avg cost of pdtn
- any given lvl of output
- firm able to vary all factor inputs
2
Q
Assumptions in LR avg cost curve
A
- constant factor px
- constant state of tech
3
Q
Shape of LRAC
A
- u-shaped
- downward: internal economies of scale
- upward: internal diseconomies of scale
- min pt: Minimum efficient scale (MES) – no further economies of scale can be reaped; opt size
4
Q
Internal economies of scale
A
- fall in unit cost of pdtn firm enjoys
- as it increases in size
5
Q
Sources of internal economies of scale
A
- Technical economies
- Marketing economies
- Financial economies
- Managerial economies
- Economies of scope
6
Q
Technical economies (Division and specialization of labour)
A
- workers specialize
- > efficient, saves time
- more output in given time
- increase in productivity
- lower unit cost of pdtn
7
Q
Marketing economies (Bulk buying)
A
- buy in bulk (e.g. raw materials
- lower px
- discounts when suppliers want to maintain good relations with large firms
8
Q
Financial economies
A
- large firms’ cost of borrowing lower than small firms
- banks charge lower I/R
- > credit-worthy (btr able to repay loans)
9
Q
Economies of scope
A
- multi-product pdtn
- lowers AC
- produce range of pdts
- spreading of various overhead costs ie. large-scale distribution. advertising, marketing
10
Q
Internal diseconomies of scale
A
- rise in unit cost of pdtn
- expands beyond MES
11
Q
Sources of diseconomies of scale
A
- Complexity in management
- Difficulty in coordination
12
Q
Complexity in management
A
- most significant
- > bureaucratic (more rules)
- decision-making process slows down – excessive red tape
- takes longer to produce, rise in unit cost
13
Q
Difficulty in coordination
A
- organization becomes too complex
- too many departments and employees
- bottlenecks may appear
- hinder pdtn, increase unit costs
