LS4 - Economies & Diseconomies Of Scale Flashcards

1
Q

what can happen in the long run when firm changes inputs

A
  • constant returns to scale
  • increasing returns to scale
  • decreasing returns to scale
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2
Q

increasing returns to scale

A
  • 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
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3
Q

constant returns to scale

A
  • 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
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4
Q

decreasing returns to scale

A
  • 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
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5
Q

difference between diminishing and decreasing returns

A

diminishing returns is in the short run and decreasing returns is in the long run

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6
Q

LRATC represents

A
  • lowest possible average costs when all resources are variable
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7
Q

reasons for LRAC curve shape

A
  • -ve gradient where increasing economies of scale
  • when straight line constant returns of scale
  • when +ve gradient decreasing returns to scale
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8
Q

types of economies of scale

A
  • technical
  • managerial
  • marketing
  • financial
  • purchasing
  • risk-bearing
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9
Q

technical economies of scale

A
  • 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
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10
Q

managerial economies of scale

A
  • 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
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11
Q

marketing economies of scale

A
  • 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
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12
Q

financial economies of scale

A
  • 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
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13
Q

purchasing economies of scales

A
  • 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
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14
Q

risk-bearing economies

A
  • 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
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15
Q

what is an economy of scale

A

decreases in average costs of production over the long run as a firm increases all its inputs

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16
Q

what is an diseconomy of scale

A

increases in average costs of production as a firm increases its output by increasing all inputs

17
Q

reasons for diseconomies of scale

A
  • co-ordination and monitoring difficulties
  • communication difficulties
  • poor worker motivation
18
Q

co-ordination and monitoring difficulties

A

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

19
Q

communication difficulties

A

larger firm may find it harder to communicate between different departments increasing inefficiencies and higher average costs

20
Q

poor worker motivation

A

if workers lose motivation they become less efficient with costs per unit of output increasing