14. Economies of Size

Question 1

What percentage of US farms have annual sales of less than $50K?

Answer 1

3/4

Question 2

What percentage of US farms have annual sales of greater than $1mil?

Answer 2

Less than 1%

Question 3

Farms over $__ in sales account for less than 6% of all farms but dominate American agriculture output.

Answer 3

$250,000

Question 4

What percentage of the Nation’s net cash farm income was earned by the large farms?

Answer 4

75%

Question 5

Define: Economies of Size

Answer 5

ATC (average total cost) per unit of output decreases as output increases
Incentive to become larger

Question 6

Define: Diseconomies of Size

Answer 6

ATC (average total cost) per unit of output increases as more output is produced
Incentive to become smaller

Question 7

Describe the cost curves for a diminishing marginal returns production function

Answer 7

TC (total cost): increases at an increasing rate immediately
AVC (average variable cost): increasing at an increasing rate at all levels of output, therefore MC only crosses ATC at its minimum

Question 8

What are causes of economies of size?

Answer 8

Cost advantage obtained by size or scale of operation
Fixed costs spread over more units of production/output
Fixed costs tend to not increase proportional to output
Full use of existing resources
Division of labor
Engineering economics
Use of specialized resources/technologies
Imput prices
Output prices
Financial (lower interest, more financial vehicles)
Management (can oversee more total production)

Question 9

When does economies of size work best?

Answer 9

With long runs of a particular product and grade of product e.g commodity production

Question 10

When does economies of size tend to not work?

Answer 10

With specialized products or with switching grades frequently e.g. not with niche markets

Question 11

What occurs when the optimum cost point is passed?

Answer 11

Costs per unit production then increase

Question 12

What causes diseconomies of size?

Answer 12

Management/labor supervision (communication costs, problems with labor efficiency, political, animal welfare)
Outside pressures of large livestock operations (odor, manure disposal, disease management)
Geographic dispersion (exceeding supply of a cheap raw material, saturating a market, increased shipping costs)
Higher defect rates