LS4

Question 1

What are constant returns to scale?

Answer 1

Output increases in the same proportion as factor inputs

Question 2

What are increasing returns to scale?

Answer 2

Increasing factor inputs leads to a proportionality larger increase in output

Question 3

What are decreasing returns to scale?

Answer 3

An increase in all factor inputs leads to a proportionally smaller increase in output

Question 4

Explanation for the LRAC curve

Answer 4

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

Question 5

What is the law of diminishing returns?

Answer 5

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

Question 6

What is marginal product?

Answer 6

Extra product produced when you add 1 extra unit of FOP

Question 7

What is economies of scale?

Answer 7

A decrease in the average cost of production over the long run as a firm increases all its inputs
Spread over more units

Question 8

LRAC curve

Answer 8

Downward slope due to economies of scale(increasing returns to scale)

Question 9

What are the types of economies of scale?

Answer 9

Technical, managerial, marketing, financial, purchasing, risk bearing, external

Question 10

What are technical economies of scale?

Answer 10

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

Question 11

What is managerial economies of scale?

Answer 11

Larger firms have expert specialist managers to make better decisions, lower cost per output

Question 12

What is marketing economies of scale?

Answer 12

Advertising costs are fixed regardless of output so more output means lower average cost
Brand awareness and loyalty also reduce the need to advertise

Question 13

What is financial economies of scale?

Answer 13

Larger firms are more reliable and less risky so it’s easier to borrow money for expansion

Question 14

What is purchasing economies of scale?

Answer 14

Firms input large amounts of raw materials so can negotiate better deals as suppliers rely on them. Possible discounts

Question 15

What is risk bearing economies of scale?

Answer 15

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

Question 16

What are external economies of scale?

Answer 16

Local colleges may offer qualifications which reduce training cost
Large companies may lead to supplier moving or better roads

Question 17

What is diseconomies of scale?

Answer 17

An increase in average cost as output rises(decreasing returns to scale)

Question 18

What are the reasons for diseconomies of scale?

Answer 18

Coordination and monitoring difficulties cause inefficiencies
Communication difficulties 
Low motivation leads to less efficiency 
Principle agent problem
Wastage due to mis coordination