micro economies of scale Flashcards
Define Economies Of Scale
economies of scale is the reduction in LRAC (long run average cost) as output increases
Define Diseconomies of scale
An increase in LRAC (long run average costs) as output increases
What are the two types of economies of scale?
Internal
External
What is Internal economies of scale?
Really Fun Mums Try Making Pies
R- risk being
F- financial
M- managerial
T- technological
P- purchasing
Explain each factor of internal economies of scale?
RISK BEARING: As a business gets bigger can spread their risks, opportunity costs over a larger range of output COSTS INCREASE BUT QUANTITY IS FASTER
FINANCIAL: as firms get larger they can negotiate lower interest rates with banks as that have a better reputation so the bank will think that they are at lower risk of not paying back so is more likely to allow. They increase costs but costs spread over wider range of output.
MANAGERIAL: As a firm gets larger can employ specialist managers these managers can track productivity of the workforce and boost it also they bring in specialised skills.
TECHNICAL: Larger firms bring in specialist machinery as firms get larger it will boost costs initially. But it boosts productivity using factory’s more efficiently or can employ more workers and make the workers specialised
MARKETING: As a firm gets bigger they may bulk buy any advertising and can negotiate for a better price this means spreads costs over a wider range of output.
PURCHASING: bigger firms are able to buy their raw materials in bulk thus means that they can negotiate the unit price. spreads costs over wider range of output. Cost increases but quantity increases faster .
What are the factors/ problems with diseconomies of scale being when a business gets too big?
(3C’s and one M)
CONTROL: the larger the workforce the less control over the workers meaning reduced productivity
COMMUNICATION: The larger the workforce the harder it is to communicate from within e.g CEO to worker on the shop floor
COOPERATION: as firm gets bigger becomes harder to coordinate different parts of the business. productivity decreases costs rise faster than quantity
MOTIVATION: the larger the firm the more worker that there is meaning that the workers are going to feel less and less valued very disposable this may lower motivation therefore reduce productivity.
What is profit maximisation?
ME=MC, AC=AR
pros:
reinvestment
dividends for shareholders
reward for entrepreneurship
lower costs and prices for consumers
cons
lack of knowledge about MC and MR
greater scrutiny and key stakeholders are harmed
other objectives more important/appropriate
What is revenue maximisation?
MR=0
1) economies of scale when COP lowered so average prices for consumers is lower
2) predatory pricing is when the profit revenue is lower than profit maximum this means very risky for other firms to enter market and is risking profits by doing this
3) principal agent problem shareholders make want to maximise revenue to have more money in their pocket this is only good for them short run whereas managers may think market sales profit is more important whereby they reduce the prices and gain more awareness of their brand gain sales and profits that way more of a long term win but very risky cant guarantee it
what is sales maximisation?
AR=AC
firms accepting lower prices for their goods and services to attract wider number of customers to make more sales and generate more profit in that way they risk loosing profit
Barriers to entry?
Lloyds, T, S,B
LEGAL
insurance
permits licences
red tape, paper work excessive
standards of regulation
Technical
high set up costs
economies of scale
natural monopolies
Strategic
predatory pricing
advertising
brand loyalty
Barriers to exit
Redundancy costs costs paying workers after leaving market
sunk costs losses a business will make dpfrim assets too specific to business to be sold
penalties for ending contract early
what are the assumptions of allocative efficiency?
- many buyers and sellers
- perfect information
- no barriers to entry or exit
- firms profit max
- consumer utility max
