theme 3 - economies of scale

Question 1

what is the long run

Answer 1

this is a period of time in which a firm can adjust all of its factors of production

Question 2

define economies of scale

Answer 2

a fall in long run average cost of production as out put rises

Question 3

define the constant returns to scale / optimum level of production

Answer 3

this is the output for which the long run average cost of production is lowest

Question 4

distinguish between total cost of production and average total cost of production

Answer 4

total cost of production refers to the amount of money spent creating a product
average cost refers to the total cost divided by out put

Question 5

define minimum efficient scale of production

Answer 5

this refers to the lowest output that also causes a minimum average long run cost of production

Question 6

define dis-economies of scale

Answer 6

this is when the long run average cost of production rises as a result of increased output

Question 7

define internal economies of scale

Answer 7

a fall in long run average cost of production as output rises within a firm, caused by advantages internal to the firm

Question 8

give examples of internal economies of scale

Answer 8

• technical economies of scale
• marketing economies of scale
• purchasing economies of scale
• managerial economies of scale
• financial economies of scale
• risk bearing economies of scale

Question 9

describe technical economies of scale

Answer 9

this relates to the aspects of the production itself, this could mean

• robots that mass produce goods
• specialized work force as the company can afford to hire more
• the container principal

Question 10

describe the container principal

Answer 10

this refers to the cubic law where doubling the dimensions of a cube leads to a greater proportion of volume added
so by increasing the size of the transport delivering the goods you can greatly increase the volume of good being transported for nearly the same price.
it applies for - transport and storage

Question 11

describe marketing economies of scale

Answer 11

larger firms can afford to pay larger sums of money to advertisers. this causes there products to be seen by many people. the average cost of the ad is less

Question 12

describe purchasing economies of scale

Answer 12

this is when larger firms can purchase larger amounts of stock at once. this can lead to discounts for the firm and leads to reduced average cost of transport

Question 13

describe managerial economies of scale

Answer 13

this is when a larger amount of worker allows specialization to take place.

Question 14

describe financial economies of scale

Answer 14

larger firms are seen as more credit worthy so banks are able to lend them money at a much lower interest rate.
they also have access to a wider range of cheaper sources of finance eg selling shares

Question 15

risk bearing economies of scale

Answer 15

larger firms are able to diversify into more markets by investing in those areas or taking over other businesses in those market.
eg coca cola taking over innocent fruits

Question 16

define an external economy of scale

Answer 16

A falling average cost of production, shown by a downwards shift in the long run average cost resulting from a growth in the size of the industry in which the firm operates

Question 17

explain why the growth of industry within an area can lead to lower long run average costs for a company

Answer 17

as an area develops

• there can be better transport links
• there can be a great amount of skilled workers
• a greater amount of research and development facilities
• a greater amount of component suppliers
• technological advancements

Question 18

define internal dis-economies of scale

Answer 18

this is a rise in long run average cost of production for a business as it expands beyond it optimum size.

Question 19

state four reasons for dis-economies of scale

Answer 19

lack of control
lack of co-ordination
lack of co-operation
lack of communication

Question 20

describe how a lack of control leads to dis-economies of scale

Answer 20

in larger firms it is very difficult to monitor productivity and quality of output when there are hundreds or thousands of workers.
this means some workers can slack off without penalty

Question 21

describe how a lack of co-ordination leads to dis-economies of scale

Answer 21

it can be very hard to organise complicated production processes when factories are based in many different regions. these companies have to spend a lot of time managing contracts with many different suppliers

Question 22

describe how a lack of co-operation leads to dis-economies of scale

Answer 22

workers may lose motivation in huge businesses as they feel like they aren’t important, this can cause there productivity to fall

Question 23

describe how a lack of communication leads to dis-economies of scale

Answer 23

unfavorable decisions may be made

Question 24

describe how internal dis-economies of scale could be avoided

Answer 24

• performance related pay - pay based on how much output produced - could encourage motivation
• companies can outsource to other companies
• developing human resources ie training and support for staff

Question 25

define external dis-economies of scale

Answer 25

this is when the long run average cost rises due to the industry exceeding its optimum size

Question 26

why does external dis-economies of scale occur

Answer 26

this occurs when the industry expands too quickly, firms end up competing with each other. they compete over inputs such as workers and materials pushing up the prices for these items