LS4 - Economies & Diseconomies Of Scale Flashcards
what can happen in the long run when firm changes inputs
- constant returns to scale
- increasing returns to scale
- decreasing returns to scale
increasing returns to scale
- if a firm doubles inputs and outputs more then double
- output increases more than in proportion to the increase in all inputs
- given a percentage increase in all inputs outputs increase by a larger percentage
constant returns to scale
- when inputs double so does output
- output increases in the same proportion as all inputs
- given a percentage change in all inputs, output increases by the same percentage
decreasing returns to scale
- if a firm doubles inputs and output increases by less then double
- decreasing returns to scale - output increases less than in proportion to the increase in inputs
- given a percentage change in inputs, outputs increases by a smaller percentage
difference between diminishing and decreasing returns
diminishing returns is in the short run and decreasing returns is in the long run
LRATC represents
- lowest possible average costs when all resources are variable
reasons for LRAC curve shape
- -ve gradient where increasing economies of scale
- when straight line constant returns of scale
- when +ve gradient decreasing returns to scale
types of economies of scale
- technical
- managerial
- marketing
- financial
- purchasing
- risk-bearing
technical economies of scale
- some capital equipment is designed for large-scale production
- tech can make large-scale production more efficent/productive
e.g storage of container increases proportionally larger then surface area so cost of storage falls
managerial economies of scale
- large firms employ managers to take care of different areas of business that they have expertise in
- no of mangers usually doesn’t depend on production scale, reduces cost per unit
- firms can get too large so hard for managers to manage - likely to be diseconomies of scale
marketing economies of scale
- advertising is usually a fixed, so as more units cost is spread out
- larger firms have brand awareness and is well known so don’t have to advertise as much
financial economies of scale
- large firms with good rep may be able to raise finance for expansion on more favourable terms compared to a small firm
- reinforces market position and makes it harder for small firms to establish themselves
purchasing economies of scales
- when a firm is large it will purchase inputs on a large scale e.g. raw materials, energy and transport
- when bulk buying may get a better deal reducing average cost as output increases
risk-bearing economies
- larger firms can diversify into different markets
- if demand for one product falls it’s likely another products demand increases
- firms can take more risks as if unsuccessful then other activities/products can absorb failure more easily
what is an economy of scale
decreases in average costs of production over the long run as a firm increases all its inputs
what is an diseconomy of scale
increases in average costs of production as a firm increases its output by increasing all inputs
reasons for diseconomies of scale
- co-ordination and monitoring difficulties
- communication difficulties
- poor worker motivation
co-ordination and monitoring difficulties
as a firm gets larger then management may find it hard to co-ordinate and organise operations and monitoring causing inefficiencies to increase and higher average costs
communication difficulties
larger firm may find it harder to communicate between different departments increasing inefficiencies and higher average costs
poor worker motivation
if workers lose motivation they become less efficient with costs per unit of output increasing
