3.3.3 economies of scale

Question 1

what are economies of scale

Answer 1

cost advantages large firms have over small firms; total costs rise but long run average costs fall

Question 2

what are diseconomies of scale

Answer 2

cost advantages small firms have over large firms: choosing to stay small to have low average costs

Question 3

internal e.o.s

Answer 3

when the firm grows or shrinks

Question 4

external dis.e.o.s

Answer 4

when the industry grows, leading to spill-over effect

Question 5

short-run refers to …

Answer 5

at least one factor of production is fixed = crowding out

Question 6

long-run refers to ….

Answer 6

all factors of production are variable

Question 7

Is monopsony bargaining power internal or external?

Answer 7

Internal

Question 8

Describe costs related to Monopsonies

Answer 8

1. Rise in TVC as purchasing large quantity of inputs increases total spending
2. Fall in AVC due to strong bargaining power, reducing cost per unit of input
3. Leading to fall in LRAC

Question 9

Is financial an economy of scale Internal or external?

Answer 9

Internal

Question 10

Is risk-bearing an economy of scale or diseconomy of scale?

Answer 10

Internal

Question 11

Describe costs related to Financial economies of scale

Answer 11

1. High TFC due to investments in infrastructure and technology so large firms are able to borrow more at lower interest rates as there’s less risk for the lender due to collateral
2. Low AFC as large output spreads fixed costs over many units
3. Leading to fall in LRAC

Question 12

Describe costs related to Risk bearing economies of scale.

Answer 12

1. High TFC as large firms can take larger risks since they can spread out the cost over millions of units sold, thus can diversify
2. This means lower LRAC since they’re less vulnerable to disruptions

Question 13

Is marketing Internal or external?

Answer 13

Internal

Question 14

Describe costs related to marketing

Answer 14

1. High TFC = High TC due to large marketing campaigns which are expensive but very effective
2. Rise in Q sold dilutes fixed costs over time, so AFC falls as Q rises
3. LRAC falls

Question 15

Is managerial Internal or External

Answer 15

Internal

Question 16

Describe costs related to managerial

Answer 16

1. Large TNC’s offer higher salaries and recruit best talent, so TFC rises
2. In short-run, division of labour increases productivity so there’s fall in LRAC

Question 17

Is containerisation internal or external

Answer 17

Internal

Question 18

Describe costs related to containerisation

Answer 18

1. large firms use large containers to export goods due to large volume demanded
2. transport costs fall so TFC rises but TC falls and AC falls
3. LRAC falls

Question 19

Is technical internal or external

Answer 19

Internal

Question 20

Describe costs related to technical economies of scale

Answer 20

1. large firms invest in high fixed costs capital goods like advanced tech
2. so productivity rises
3. AC falls while TFC rises so LRAC falls

Question 21

Is regulatory capture internal or external

Answer 21

internal

Question 22

Describe costs related to regulatory capture

Answer 22

1. large firms able to lobby regulators and governments to get preferential treatment
2. since they provide jobs at mass-scale, so if they were to be regulated, the government would lose a lot of tax revenue
3. Fall in TFC and AFC = fall in LRAC

Question 23

Average costs formula involving TC and Q

Answer 23

TC/Q

Question 24

Average costs formula involving AFC and AVC

Answer 24

AFC + AVC

Question 25

AFC formula involving TFC and Q

Answer 25

TFC/Q

Question 26

AFC formula involving AC and AVC

Answer 26

AC - AVC

Question 27

AVC formula involving TVC and Q

Answer 27

TVC/Q

Question 28

AVC formula involving AC and AFC

Answer 28

AC - AFC

Question 29

MC formula

Answer 29

change in TVC/change in Q

Question 30

TC formula involving AC and Q

Answer 30

AC x Q

Question 31

TC formula involving TFC and TVC

Answer 31

TFC + TVC

Question 32

TFC formula involving AFC and Q

Answer 32

AFC x Q

Question 33

TFC formula involving TC and TVC

Answer 33

TC - TVC

Question 34

TVC formula involving AVC and Q

Answer 34

AVC x Q

Question 35

TVC formula involving TC and TFC

Answer 35

TC - TFC

Question 36

Describe principal-agent problem

Answer 36

1. As firms grow, separation between ownership and control increases 2. Owners want to maximise profit 3. Workers want to maximise utility 4. conflicting objectives 5. Worker effort is unobservable so asymmetrical information and free-rider problem.