The Conceptual Foundations of Economies of Scale Flashcards
What do Economies of Scale describe?
The phenomenon whereby long-run average costs decline as the scale of output increases.
What happens to the cost per unit of output as output rises, according to Economies of Scale?
The cost per unit of output falls, ceteris paribus.
What is the formal condition for economies of scale?
d(AC) / dQ < 0
What does AC stand for in the context of Economies of Scale?
Average Cost (Total Cost divided by Quantity)
In the formula d(AC) / dQ, what does Q represent?
Quantity of output
What does d(AC) / dQ indicate in the context of Economies of Scale?
The derivative of average cost with respect to output
What does the condition d(AC) / dQ < 0 imply?
Each additional unit of output lowers the cost per unit on average.
What type of relationship does Economies of Scale describe?
A non-linear relationship arising from systemic efficiencies at scale.
What are Internal Economies of Scale?
They arise from within the boundaries of a single firm as it expands its scale of operations.
How are Internal Economies of Scale characterized?
They are endogenous to the firm’s internal decision-making and capital allocation.
What do Internal Economies of Scale reflect?
Increasing returns to scale in production.
Internal Economies of Scale involve shifts along which function?
The firm’s long-run cost function.
What do Technical Economies reflect?
Productivity gains
What allows firms to overcome technical indivisibilities?
Large-scale production
What often cannot be economically justified at low output levels?
Machinery, capital equipment, and management structures
What happens to fixed costs as output increases?
They are amortised over more units
What becomes viable as output increases, leading to productivity gains?
Labour specialisation
According to Smith, what is the concept leading to productivity gains?
Division of labour
Give an example of Technical Economies in production.
A large steel plant may afford a blast furnace that produces at a lower marginal cost than smaller-scale operations
In cost function terms, what happens to the fixed cost of highly efficient capital?
It is spread over a larger output
What effect does spreading fixed costs over a larger output have on average fixed cost?
It reduces the average fixed cost component of total cost
What are managerial economies of scale?
Reductions in average cost per unit due to specialisation and subdivision of administrative and managerial functions as a firm expands.
What is the significance of hiring specialist managers in larger firms?
Improves decision quality and operational coordination.
Who proposed the theory of Division of Labour?
Adam Smith.
