Yr 2 Economies of scale Flashcards
Definition of economies of scale
Reduction in LRAC as output increases
Definition of LR
Where all FOP are variable
Definition of diseconomies of scale
An increase in LRAC as output increases
Definition of increasing returns to scale
% change of output > % change of input
Definition of constant returns to scale
% change of output = % change of input
Definition of decreasing returns to scale
% change of output < % change of inputs
What are internal economies of scale
Where the reduction of LRAC is within the business control
Really Fun Mums Try Making Pies is linked with EOS, how?
R= Risk bearing-risk spread across the large output range
F=Financial - Firms big, can get large loans, and costs are spread
M=Managerial - Specialist managers, productive
T=Technical - specialist machinery
M=Marketting- bulk buy advertisements, costs spread
P=Purchasing- Raw materials bought in bulk, costs spread
What are external EOS?
When LRAC falls due to reasons outside the business
Example of External EOS
Better transport
Better research and development
The useful suppliers move closer, its in their interest
Why do diseconomies of scale occur?
Because the firm has grown too big
Examples of diseconomies of scale(3 c’s and m)
Control - less control because of too much labour, less productivity
Communication - cant spread messages because so many people, time waste
Coordination - different departments may struggle to work together, less productive
Motivation - each worker thinks they don’t impact the company, start to slack off
Ha, now draw the LRAC curve
silence
What’s the minimum efficient scale?
Lowest level of output to fully exploit EOS
