3.3.3 Economies and diseconomies of scale Flashcards
(25 cards)
what are returns to scale?
how the output of a bus responds to a change in inputs
what happens in the lr to do w production?
in the lr, all fop are variable and the scale of producrion can change
in the lr buses are looking for output to combine what?
combine labour and capital
what process is involved in combining labour and capital?
involves a proc of capital-labour substitution where capital machinery and new tech replaces some of the lab output
why do firms want to combine labour and capital?
combine labour and capital in a way that maximises productivity and reduces unit costs towards their lowest level
what are eos?
Economies of scale occur when long run average costs fall with increasing output.
what are eos the advantages of?
Economies of scale are the advantages of large scale production that enable a large business to produce at a lower average cost than a smaller business.
what do firms experience as a result of eos?
As a result, the firm is able to experience increasing returns to scale where an increase in inputs by a certain percentage will lead to a greater percentage increase in output.
what are internal eos?
Internal economies of scale occur when an individual firm becomes more efficient, reducing the average total cost of production.
what is srac explained by compared to lrac?
-SRAC: Law of Diminishing (Marginal) Returns
-LRAC: economies/diseconomies of scale
what do lower lrac costs represent?
These lower costs represent an improvement in productive efficiency and can give a business a competitive
advantage in a market.
* They can lead to lower prices for consumers and higher profits / dividends for shareholders.
* As long as the long run average total cost curve (LRAC) is falling, then internal economies of scale are being
exploited by a business.
what do lower lrac/ eos lead to?
They can lead to lower prices for consumers and higher profits / dividends for shareholders.
What does it indicate when a business’s long-run average total cost (LRAC) curve is falling?
It indicates that the business is exploiting internal economies of scale.
Why does the long-run average total cost (LRAC) curve fall as internal economies of scale are exploited?
Because the cost per unit decreases as the firm increases its scale of production, spreading fixed costs over a larger output.
what are the 6 internal eos’s?
- financial
- purchasing
- marketing
- technical
- managerial
- risk bearing
alienation
Workers feel alienated in very large firms, like they’re just another cog in the machine. This leads to demotivation, decreasing productivity, increase LRAC.
- eg, call centres in India
bureaucracy
Bureaucracy is all the paperwork, managers, filing and secretaries that a firm has to pay for when it expands, increasing LRAC.
communication
In big firms, employees may argue with each other and communication will be slow because big firms have so many layers. These factors will reduce productivity, increasing LRAC.
consequences of diseconomies of scale
- lead to a rise in a firm’s long run average cost of production.
- They result from a business expanding beyond an optimum size and losing productive efficiency
- Higher long run average costs will reduce the profitability of a business if their prices remain the same
What happens when a business moves beyond its optimum size?
It may suffer from productive inefficiency, which can arise due to organisational or managerial slack.
How might a business’s size lead to the loss of human capital?
Breakdowns in communication can lead to the departure of highly skilled workers, resulting in a loss of human capital.
What impact can low worker morale have on a business that has grown too large?
Low morale can reduce productivity and increase unit costs, which may reduce total profs
Why might a business need to raise prices after growing beyond its optimum size?
Higher unit costs from inefficiencies may force the business to raise prices to cover increased costs
How can moving beyond optimum size affect a business’s competitiveness?
Lost competitiveness can lead to a declining market share and, if listed, a fall in the share price, potentially making the business vulnerable to takeovers.
