LS4 - Economies And Diseconomies Of Scale

Question 1

What happens to a firm as it increases its scale of output in the LR

Answer 1

• As a firm increases its scale of output in the long run, its long run average total cost decrease
because of the benefits it receives (economies of scale)
• As a firm increases its scale output in the long run it’s LRATC will increase (diseconomies of scale)
- increasing returns to scale

Question 2

Returns to scale

Answer 2

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

Question 3

Types of economies of scale - internal

Answer 3

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* 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