Economies and diseconomies of scale Flashcards
What is economies of scale?
Its when a firm increases its scale of output in the long run, its long-run average total costs will initially decrease due to the benefits it receives.
What is diseconimies of scale?
When a firm increases its scales of output in the long run its long run average total costs will increase at some point.
During this period the firm is facing decreasing returns to scale.
What are some types of economies of scale?
Financial economies
Managerial economies
Marketing economies
Purchasing economies
Technical economies
Risk-Bearing economies
What are some diseconomies of scale?
Management diseconomies
Communications diseconomies
Geographical diseconomies
Cultural diseconomies
What is marketing economies of scale?
In large firms, fixed costs such as advertising campaigns have a smaller affect on the cost per unit.
What is managerial economies of scale?
This is the division of labour where firms employ specialists to supervise production systems.
What is financial economies of scale?
The financial markets usually rate larger firms to be more credit worthy and have access to credit with favourable rates of borrowing.
What is network economies of scale?
Some networks and services have huge potential for economies of scale. That is as they are more widely used, they become more valuable to the business that provides them.
What is external economies of scale?
These involve changes outside the business i.e. they result from the expansion of the entire industry of which the business is a member.
What are causes of diseconomies of scale?
Control and communication
Co-operation problems
Negative effects of internal corporate politics
What are the consequences of diseconomies of scale?
Leads to a rise in a firms long run average cost of production
They result from a business expanding beyond an optimum size.
What is minimum efficient scale?
It is the scale of production where all the internal economies of scale have been fully exploited.
What are the causes of having high minimum efficient scale?
MES will tend to be high when the fixed costs of setting up production are large
It will tend to be high when the marginal cost of supplying to extra customers is low relative to fixed costs
