Micro 3

Question 1

External economies of scale definition

Answer 1

Advantages that firms can gain from the industry growing in size in the form of lower average costs

Question 2

Advantages of economies of scale (4)

Answer 2

Average long run average cost decreases
Internal economies of scale
External economies of scale
Larger share of the market/ gain monopoly power

Question 3

Disadvantages of economies of scale (2)

Answer 3

Diseconomies of scale
Due to lack of coordination, control and communication

Lack of personal service

Question 4

Disadvantages of monopolies (3)

Answer 4

Higher prices due to high costs
Diseconomies of scale
Exploit monopoly power to increase prices due to lack of competition

Lack of personal service
Unable to respond to personal needs

Not flexible
Unable to respond to changes in demand

Question 5

Reasons to regulate monopolies (5)

Answer 5

Prevent market failure

Have monopoly power so have high prices
Reduce quality and choice
High barriers to entry

May not take into account external costs
Long hours disturbs nearby people, pollution

Sell harmful products e.g. cigarettes
People are unaware of private costs

Exploit workers
Long unsafe hours

Question 6

Reasons to not regulate monopolies (2)

Answer 6

Adding regulation increases costs
Reduces output and lowers employment

Inefficient as it reduces responsiveness in market conditions
Reduces innovation and choice