3.3.3 Economies and Diseconomies of Scale Flashcards
(29 cards)
What are economies of scale?
An advantage of large-scale production. Allows larger firms to have lower average cost than smaller firms
What are diseconomies of scale?
In larger firms, where growth is so large that average cost per unit begins to increase
What are the two different types of economies of scale?
Internal
External
What are internal economies of scale?
Reduction in average unit costs as the firm increases in size
What are external economies of scale?
Reduction in average unit costs of the firm as a result of an increase in the size of the industry
What are increasing returns to scale?
An increase in inputs leads to a proportionately greater increase in output
What are constant returns to scale?
An increase in inputs leads to the same proportional increase in output
What are decreasing returns to scale?
An increase in inputs leads to a less than proportional increase in output
What are the axis for LRAC?
LRAC is drawn for input prices and level of technology
LRAC is long run average costs
What is the minimum efficient scale?
The lowest average cost of production in the long run
Where is the minimum efficient scale on the LRAC?
The lowest point on the LRAC curve
What is the optimum level of production?
The output range on the LRAC over which average costs are minimum
This is productive efficiency
Where is economies/diseconomies of scale on LRAC?
Economies of scale are before the the optimum level of production
Diseconomies of scale are after the optimum level of production
What are the different types of internal economies of scale?
Technical
Marketing
Financial
Managerial
Networking
Risk-bearing
What are the factors technical internal economies of scale?
Increased investment in capital lowers cost
Specialisation
Balanced team of machines at each stage of production is optimal
Larger machinery is more accessible to larger firms due to indivisibility
Research and development
What are the factors of marketing internal economies of scale?
Bulk buying raw materials is cheaper
Specialisation
Advertising costs are fixed so cost per unit is minor as output increases
Better transport rates as ship lots at once lowers cost per unit
What are the factors of financial internal economies of scale?
Large firms are more creditworthy: lower rates
Raising capital through shares/bonds is cheaper than loans
Bulk borrowing reduces cost per unit borrowed
Supplier give longer payment period for larger firms improving cash flow/reducing costs
What are the factors of managerial internal economies of scale?
Specialisation
Division of Labour
How does networking contribute to internal economies of scale?
Use of common language or currency reduces marginal cost of additional units
How does risk-bearing lead to economies of scale?
Expanded product range spreads risk for larger firms
Unsuccessful products collapse one part of a firm
What are the different external economies of scales?
Labour
Improved Infrastructure
How does labour contribute to external economies of scale?
Firms in regions with other successful competitors attract labour in the same industry
Staff trained by other firms can be hired lowering cost of training
How does improved infrastructure contribute to external economies of scale?
Lower production costs
Faster and cheaper transport reduces cost
Utilities become more reliable and efficient encouraging production
What are the different diseconomies of scale?
Workers
Geography
Change
Price of materials
Management
