Micro L4 - 7 Flashcards
Constant returns to scale:
Output increases in the same proportion as all inputs
Increasing returns to scale:
Output increases by a lather proportion than all inputs
Decreasing returns to scale:
Output increases by a smaller proportion than all inputs
What does the long-run average total costs represent?
Lowest possible average cost
What is the relationship between SRATC and LRATC?
LRATC is a tangent to each of short-run cost curves
Economies of scale:
Decreases in long-run average costs of production as firm increases all its output
What do falling average costs mean for returns to scale?
There will be increasing returns to scale
Internal economies of scale (really fun mums try making pies):
1) Risk-bearing
2) Financial
3) Marketing
4) Technical
5) Managerial
6) Purchasing
How do technical economies of scale make large-scale production more efficient?
- The larger the object, the lower the AC of storage
- Some capital equipment is designed for large scale production
- High overhead expenditures that may only be viable when a firm is large enough
- Existing capital used more efficiently
- Specialist machinery boosts productivity
- Employ more workers as firm gets large to specialise
How do managerial economies of scale make large-scale production more efficient (+ evaluation)?
- Can employ specialist managers, which leads to better decision making abilities + increased productivity
- May experience diseconomies as AC may rise as firm is so large that management becomes difficult
How do marketing economies of scale make large-scale production more efficient?
- Advertising is usually a fixed cost so it is spread over more units (bulk-buy) , meaning cost per unit is lower
- Benefit from brand awareness of well-known brand
How do financial economies of scale make large-scale production more efficient?
Large firms may have the advantages of a strong rep such as negotiation of lower interest rates as banks think they are low risk
How do purchasing economies of scale make large-scale production more efficient?
- Good deals can be negotiated when inputs are purchased in relatively large volumes (bulk-buying)
- Costs can be spread across wider range of output
How do risk-bearing economies of scale make large-scale production more efficient?
- Can diversify leading to more predictable demand
- Can afford to take risks spread over more units
External economies of scale (involved in industry but outside firm):
1) Better transport infrastructure –> cheaper for transportation of supply
2) Component supplies may move closer –> cheaper for transportation of supply
3) R & D firms move closer –> improve tech, reducing costs
Diseconomies of scale:
Increases in long-run average costs of production as firm increases its output
MES:
- Minimum efficient scale
- Lowest level of output required to exploit full economies of scale
What part of the LRAC curve is each economy of scale? responsible for?
- Downward sloping –> Increasing returns (economies of scale)
- Horizontal section
- Upward sloping –> Decreasing returns (diseconomies of scale)
What are the variations of LRAC curve?
- Bucket shape (regular)
- Positive quadratic (very rare) –> immediate switch from increasing to decreasing returns to scale
- Decreasing concave up (natural monopoly) –> much higher output required for MES
Why do natural monopolies require much higher outputs for MES?
They have very high fixed costs
Reasons for diseconomies of scale (3Cs and a M):
All lead to growing inefficiencies:
- Control –> may decrease due to more workers
- Coordination and monitoring difficulties –> difficult for departments to work together
- Communication difficulties –> harder to communicate
- Poor worker motivation –> each worker feels their value is low
Profit formula:
profit ( π ) = total revenue - total costs
What is the difference between accounting and economic profit?
- Economic profit –> Considers both implicit and explicit costs
- Accounting profit –> Only explicit costs
Normal profit:
Minimum reward necessary to keep factors of production in their present use
