LS4 Flashcards
What are constant returns to scale?
Output increases in the same proportion as factor inputs
What are increasing returns to scale?
Increasing factor inputs leads to a proportionality larger increase in output
What are decreasing returns to scale?
An increase in all factor inputs leads to a proportionally smaller increase in output
Explanation for the LRAC curve
In the short run a firm operates on a SRAC curve, as output increases, cost increases
In the long run where all FOP are variable a firm can shift to new SRAC
LRAC is the minimum possible average cost
What is the law of diminishing returns?
If one variable FOP is increased while others stay fixed, eventually marginal returns will fall
Marginal product will eventually increase due to specialisation but then will fall(hiring labour with the same amount of capital
What is marginal product?
Extra product produced when you add 1 extra unit of FOP
What is economies of scale?
A decrease in the average cost of production over the long run as a firm increases all its inputs
Spread over more units
LRAC curve
Downward slope due to economies of scale(increasing returns to scale)
What are the types of economies of scale?
Technical, managerial, marketing, financial, purchasing, risk bearing, external
What are technical economies of scale?
Cost saving from larger scales
Increased dimensions of containers
Capital equipment lime combine harvesters are only suitable for large scale
Constant production lines have low average cost
Large factory cost spread over more output
What is managerial economies of scale?
Larger firms have expert specialist managers to make better decisions, lower cost per output
What is marketing economies of scale?
Advertising costs are fixed regardless of output so more output means lower average cost
Brand awareness and loyalty also reduce the need to advertise
What is financial economies of scale?
Larger firms are more reliable and less risky so it’s easier to borrow money for expansion
What is purchasing economies of scale?
Firms input large amounts of raw materials so can negotiate better deals as suppliers rely on them. Possible discounts
What is risk bearing economies of scale?
It’s safer for a larger firm to diversify
If demand for one good falls they can rely on the other and cost is absorbed
So large firms can take more risks
What are external economies of scale?
Local colleges may offer qualifications which reduce training cost
Large companies may lead to supplier moving or better roads
What is diseconomies of scale?
An increase in average cost as output rises(decreasing returns to scale)
What are the reasons for diseconomies of scale?
Coordination and monitoring difficulties cause inefficiencies Communication difficulties Low motivation leads to less efficiency Principle agent problem Wastage due to mis coordination
