3.3.3- Economies and Diseconomies of Scale Flashcards
(30 cards)
What is Economies of Scale?
The cost advantages that firms experience as they increase output. These cost savings result from more efficient use of inputs when production scales up. In the long-run all FoP are variable, so firms can expand capacity, hire more labour, buy in bulk, and invest in better technology. The average cost per unit falls because fixed and operational costs are spread over a larger output.
What is the LRAC curve?
An envelope of all possible short-run average cost curves. It shows the minimum cost at which any level of output can be produced when all inputs are variable.
Why does the LRAC curve fall initially?
Internal Economies of Scale
Why does the LRAC curve flatten after a certain point?
The Minimum Efficient Scale- The level of output at which a firm minimises its average cost. At this point, the firm has exploited all available Internal Economies of Scale. The most cost-efficient scale of operation.
What are firms producing below MES?
Inefficient
What occurs when firms producing above MES?
Costs rise due to coordination problems and other inefficiencies.
Why does the LRAC curve rise again after MES?
Diseconomies of Scale
What does the shape of the LRAC curve represent?
The U-shape reflects the trade-off between growing efficiently and becoming too large to manage well.
What happens to MES between industries?
It differs, e.g. a small bakery may reach MES more quickly than an aircraft manufacturer.
What are Technical Economies of Scale?
When firms invest in capital-intensive equipment. Larger production volumes make expensive machines worthwhile, reducing unit cost.
Why do industries with high fixed costs often have fewer and larger producers?
Technical Economies of Scale, they can afford the scale needed to be efficient.
What are Managerial Economies of Scale?
In small firms, managers often multitask, but in large firms the roles become more specialised. Having a dedicated HR manager, financial officer or logistics coordinator helps streamline operations. Each department functions more efficiently, and decisions are made by experts. This organisational structure reduces errors, speeds up workflow and allows the firm to scale operations while maintaining control.
What are Purchasing and Marketing Economies of Scale?
Large firms can purchase raw materials or components in build, securing discounts unavailable to smaller buyers. Additionally, marketing campaigns cost the same regardless of output size, so larger firms spread those costs over many more units- reducing cost per unit sold.
What are Financial Economies of Scale? (3)
- Larger firms usually have better credit ratings, making it easier and cheaper to borrow money.
- Banks and investors perceive them as less risky.
- They also have more funding options, including selling shares.
Why do smaller firms not experience Financial Economies of Scale? (5)
- Higher interest rates
- Perceived as more risky
- Limited credit access
- Higher financial costs
- Limits expansion opportunities
What are External Economies of Scale?
When the whole industry expands, benefitting all firms within it. These regional or sectoral improvements reduce costs for all nearby firms, not just one. Government investment in training/transport can also create external scale benefits.
What are Diseconomies of Scale? (3)
- When a business growing leads to higher per-unit costs.
- Usually results from complexity- managing a large workforce, slower decision-making, communication breakdowns or duplication of effort.
- Harder to ensure accountability maintain quality control or react quickly to change.
What is Managerial Diseconomies of Scale? (5)
- Layers of hierarchy develop
- Barriers to communication and decision-making
- Senior Managers may be out of touch with operations, leading to poor strategic choices.
- Middle Managers might duplicate tasks, or departments may not share information efficiently
- Increased costs and reduced productivity
What might happen to employees in a larger firm? (4)
- Employees may feel like ‘Just a Number’
- Demotivation
- Lower productivity
- Higher absenteeism and staff turnover
What is External Diseconomies of Scale? (5)
- When industry expansion increases pressure on local resources.
- For example, if many firms cluster in one area, it may become congested, pushing up transport and logistics costs.
- Skilled labour may become scarce, raising wages.
- Governments may impose new environmental rules, adding compliance costs.
- These factors affect all firms in the region.
Why is the SRAC curve shaped like it is?
In the short-run, at least one FoP is fixed, leading to a U-shaped curve. This is due to diminishing returns.
What is the LRAC curve made up of?
The lowest points of each SRAC, showing the minimum cost at each output level, when all inputs are optimally adjusted.
What does SRAC reflect?
Short-term limits
What does LRAC reflect?
Long-term efficiency
