theme 3 - economies of scale Flashcards
what is the long run
this is a period of time in which a firm can adjust all of its factors of production
define economies of scale
a fall in long run average cost of production as out put rises
define the constant returns to scale / optimum level of production
this is the output for which the long run average cost of production is lowest
distinguish between total cost of production and average total cost of production
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
define minimum efficient scale of production
this refers to the lowest output that also causes a minimum average long run cost of production
define dis-economies of scale
this is when the long run average cost of production rises as a result of increased output
define internal economies of scale
a fall in long run average cost of production as output rises within a firm, caused by advantages internal to the firm
give examples of internal economies of scale
- 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
describe technical economies of scale
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
describe the container principal
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
describe marketing economies of scale
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
describe purchasing economies of scale
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
describe managerial economies of scale
this is when a larger amount of worker allows specialization to take place.
describe financial economies of scale
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
risk bearing economies of scale
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
define an external economy of scale
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
explain why the growth of industry within an area can lead to lower long run average costs for a company
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
define internal dis-economies of scale
this is a rise in long run average cost of production for a business as it expands beyond it optimum size.
state four reasons for dis-economies of scale
lack of control
lack of co-ordination
lack of co-operation
lack of communication
describe how a lack of control leads to dis-economies of scale
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
describe how a lack of co-ordination leads to dis-economies of scale
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
describe how a lack of co-operation leads to dis-economies of scale
workers may lose motivation in huge businesses as they feel like they aren’t important, this can cause there productivity to fall
describe how a lack of communication leads to dis-economies of scale
unfavorable decisions may be made
describe how internal dis-economies of scale could be avoided
- 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
define external dis-economies of scale
this is when the long run average cost rises due to the industry exceeding its optimum size
why does external dis-economies of scale occur
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
