The law of diminishing returns

Question 1

Economies of scale

Answer 1

As the scale of production of a firm increases, the long run average cost fall

Question 2

Diseconomies of scale

Answer 2

As the scale of production of a firm increases, the long run average cost rises

Question 3

Internal economies of scale

Answer 3

Cost saving resulting from growth of the firm itself

Question 4

External economies of scale

Answer 4

Cost saving resulting from the growth of the economy or market/ industry of which the firm is a part

Question 5

Types of internal economies of scale

Answer 5

technical, managerial, R&D, marketing, financial (larger firms attract investment), purchasing (buying in bulk)

Question 6

Graphically showing internal economies of scale

Answer 6

Movement along LRAS curve from Q to Q1 with costs falling from AC to AC1

Question 7

Types of external economies of scale

Answer 7

Improved infrastructure, improved education and training, R&D, technological advancements

Question 8

External economies of scale graphically

Answer 8

LRAS shift down from LRAS1 to LRAS2