Micro 9 - Economies and Diseconomies of Scale Flashcards
Economies of Scale - definition
> When a firm benefits from reduced average costs as it increases its capacity.
Diseconomies of Scale - definition
> When a firm suffers from increasing average costs as it increases its capacity.
Increasing Returns to Scale - definition
> When each successive increase in factor inputs increases output by a greater amount than the last increase.
Constant Returns to Scale - definition
> When each successive increase in factor inputs increases output by the same amount as the last increase.
Diminishing Returns to Scale - definition
> When each successive increase in factor inputs increases output by a smaller amount than the last increase.
Minimum efficient scale of production - definition
> MES.
>The level of output at which a firm can achieve the lowest possible average cost of production.
When do economies and diseconomies of scale occur?
> Long-run only.
Causes of economies of scale - mnemonic
Really Fun Mums Try Making Pies
Causes of economies of scale - list
- Risk bearing
- Financial
- Managerial
- Technical
- Marketing
- Purchasing
Causes of economies of scale - risk bearing
> Spread risk over larger output range.
Causes of economies of scale - financial
> Negotiate lower interest rates on loans as less of a risk for banks.
Causes of economies of scale - managerial
> Can employ people to specialise in an area, which can boost productivity.
Specialist skills.
Causes of economies of scale - technical
> Bring in specialist machinery, which boosts productivity.
Factory more efficient.
Or employ more workers = increases productivity.
Causes of economies of scale - marketing
> Costs are spread over a greater quantity.
>Discounts through bulk-buying.
Causes of economies of scale - purchasing
> Bulk buying, which gets unit discounts.
>Costs spread over a greater quantity, i.e. deliveries.
Key point for economies of scale
> It’s all about AC = increase in TC/ an even greater increase in quantity.
Causes of diseconomies of scale - mnemonic
> 3 C’s and an M.
Causes of diseconomies of scale - list
- Control
- Communication
- Coordination
- Motivation
Causes of diseconomies of scale - control
> As gets larger, it’s harder to control the workforce.
>If workers know they are under less scrutiny they will slack off more = lower productivity.
Causes of diseconomies of scale - coordination
> Coordinating different parts of the business gets harder as you get larger.
Productivity suffers.
Causes of diseconomies of scale - communication
> Harder to spread messages through the company.
Increases time and effort.
Wastes time affecting productivity.
Causes of diseconomies of scale - motivation
> Each extra worker is going to feel less and less valued as there’s so many workers.
Feel like you can be replaced.
Fall in productivity.
Rise in absenteeism.
Key point for causes of diseconomies of scale
> It’s all about rising average costs caused by total costs increasing a greater rate than the increase in quantity supplied.
External vs Internal Economies of Scale
> External economies of scale involve changes outside a firm whereas internal economies of scale involve only changes within a firm.
External Economies of Scale - examples
- Better transport infrastructure
- Component suppliers move closer
- R&D firms move closer.
- Local colleges may offer qualifications reducing training costs.
External economies of scale key point
> It’s all about lower average costs due to a fall in total costs despite producing same quantity.
Q. Assess whether the increasing market share of Amazon will be beneficial to consumers. (25 marks).
- Intro. Outline argument. Definitions.
- Economies of scale. Diagram showing outward shift of MC and highlighting growth in consumer surplus.
- Limitations to EoS. Diseconomies of scale. Affect on consumer.
- Conc 1. Depends upon whether more fixed or variable costs, competition between Amazon’s suppliers. Assumes lower costs = lower price for consumers. Could reinvest.
- Market domination, ‘price maker’ - may not reduce prices. Maximise profits. Don’t operate at the point of AE or PE so deadweight loss occurs. Diagram highlighting DWL and potential welfare gain if Amazon chooses to profit maximise.
- Dynamic efficiency. MC shifts right reducing DWL as operates closer to the point of AE. Increase in their Intellectual Property Rights = benefits consumers as increases quality and innovation of products.
- If became monopoly means smaller firms forced to shut as aren’t benefitting from EoS - consumers forced to pay higher prices and face less variety of products.
- Main conc.
