Microeconomics - Economies and diseconomies of scale Flashcards
Internal economies of scale
These occur when a firm becomes larger. Average costs of production fall as output increases.
types of internal economies of scale
Risk-bearing
Financial
Managerial
Technological
Marketing
Purchasing
External economies of scale
These occur within the industry.
For example, local roads might be improved, so transport costs for the local
industries will fall.
Also, there might be more training facilities or more research and development,
which will also lower average costs for firms in the local area.
Diseconomies of scale
These occur when output passes a certain point and average costs start to increase per extra unit of output produced.
types of diseconomies of scale
Control: It becomes harder to monitor how productive the workforce is, as the firm
becomes larger.
Coordination: It is harder and complicated to coordination every worker, when there are thousands of employees.
Communication: Workers may start to feel alienated and excluded as the firm
grows. This could lead to falls in productivity and increases in average costs, as they lose their motivation.
draw a LRAC curve
…
Initially, average costs fall, since firms can take advantage of economies of scale. This means average costs are falling as output increases.
After the optimum level of output, where average costs are at their lowest, average
costs rise due to diseconomies of scale.
The point of lowest LRAC is the minimum efficient scale. This is where the optimum
level of output is since costs are lowest, and the economies of scale of production have been fully utilised.
returns to scale
Returns to scale increases when the output increases by a greater proportion to the increase in inputs. For example, if input doubles, and output quadruples, there is said to be increasing returns to scale. This occurs where there are economies of scale and factor inputs become more productive.
