Micro- Economies Of Scale Flashcards
Define economies of scale
Reduction in LRAC as output increases
Define interal EOS
cost advantages a firm can achieve as a result of its own growth and expansion
List the internal EOS
- risk bearing= spread opportunity cost
- financial= get loans from banks
- managerial= employ specialist manager
- technical= specialist machinery
- marketing= bulk buy advertising
- purchasing= buy products in bulk to spread costs over wide output
Describe external EOS
business-enhancing factors that occur outside a company but within the same industry
List external EOS
- better transport infrastructure= new roads, airports etc= decrease costs= cheaper access raw materials
- component supplies move closer to business= decrease cost of transporting raw materials
- research and development firms move closer= access to R+D= increase productivity
Define diseconomies of scale
Increase in LRAC as output increases
(Firm too big)
Reasons for DOS
- harder for managers to control workforce
- harder and longer to send messages within workforce (communication)
- harder to coordinate different departments to work together
- as business and employees increase each worker feels less valued= less motivated= decrease productivity= increase TC
Describe minimum efficient scale
Point when all internal economies of scale have been achieved
define SRAC
when the company can only increase or decrease its variable factors to affect output levels
= The short-term period in economics is the time frame where there are both fixed and variable factors
describe LRAC
a measure of the lowest cost at which a firm can produce a given level of output in the long run= when all inputs are variable
= firm has the ability to vary all of its inputs
= no diminishing marginal returns eg if too many people using one machine can just add a new machine to increase efficiency
