LS4 - Economies and Diseconomies of Scale

Question 1

Returns to scale

Answer 1

Factor by which output changes when input is increased
Constant RTS - ∂ Input = ∂ Output
Increasing RTS - ∂ Input < ∂ Output
Decreasing RTS - ∂ Input > ∂ Output

Question 2

Economies vs Diseconomies of scale

Answer 2

ES: LRAC (Long Run Av Cost) decreases as input is increased - Increasing RTS
DS: LRAC increases as input is increased - Decreasing RTS
Graph is bucket shaped –> ES to MES (min efficient scale) to DS

Question 3

Types of Economies of Scale - Internal

Answer 3

Really Fun Mums Try Making Pies
* Risk bearing - risk can be spread over a larger amount of output
* Financial - firm can receive lower rate of interest as firm grows, becomes more creditworthy
* Managerial - as firm gets large, specialist managers can be employed, improving productivity
* Technical - using specialist labour/machinery/capital to boost productivity
* Marketing - buying in bulk of advertising reduces unit costs
* Purchasing - buying in bulk of raw materials reduces unit costs

Question 4

Types of Economies of Scale - External

Answer 4

Occur outside of firm, but still in industry
* Better transport infrastructure
* Component suppliers move closer
* R/D firms move closer

Question 5

Types of Diseconomies of Scale

Answer 5

3Cs and an M
* Control - as firm grows, becomes harder for managers to control growing workforce, and labour loses productivity
* Communication - much harder to spread messages within company between management and employees - takes more time and effort, drops in productivity
* Coordination - coordinating all the different areas of a firm becomes harder as firm grows
* Motivation - each individual worker feels less valued as firm grows, motivation drops, productivity drops