Economies and Diseconomies of Scale Flashcards
What are economies of scale?
A fall in the LRAC of a firm as output increases - the advantages gained from producing on a larger scale.
What are the two types of economies of scale?
1) Internal economies of scale.
2) External economies of scale.
What are internal economies of scale?
The benefits experienced by a firm from increasing the scale of production within the firm.
What are external economies of scale?
A fall in average costs within a firm, due to changes in the industry that a firm operates in.
What are the 6 types of internal economies of scale?
1) Risk bearing economies of scale.
2) Financial economies of scale.
3) Managerial economies of scale.
4) Marketing economies of scale.
5) Technical economies of scale
6) Purchasing economies of scale.
What are technical economies of scale?
Large firms gain access to improved production methods, such as being able to afford new machinery, which lower average costs.
What are financial economies of scale?
Larger firms are better able to borrow money at lower rates of interest, as they are seen as less risky by lenders, compared to smaller firms.
What are managerial economies of scale?
Larger firms can improve efficiency, by employing specialist managers with expertise in certain areas.
What are purchasing economies of scale?
Large firms can reduce average costs by buying in bulk.
Describe the LRAC curve (3)?
1) The LRAC curve is U-shaped, showing the lowest average total cost at which a firm can produce any given level of output in the long-run.
2) Often, different SRAC curves (smaller U-shaped curves) intersect the LRAC curve, representing a different scale of operation.
3) Initially, LRAC slopes down (economies of scale), before flattening (minimum efficient scale), and then rising (diseconomies of scale).
What is the minimum efficient scale (MES)?
The lowest level of output, where LRAC is minimised.
What are diseconomies of scale?
The disadvantages of a firm expanding, causing a rise in the LRAC of production as output rises.
What are the 4 diseconomies of scale?
1) Control: Larger firms are harder to manage, due to a larger workforce. This can lead to a loss in productivity.
2) Communication: In larger companies, there are often more barriers to communication, potentially lowering productivity and staff morale.
3) Co-ordination: It is more difficult to organise and co-ordinate in a larger firm, as there are more staff members and departments. This may lead to lower productivity.
4) Motivation: Workers may be less motivated and less productive, as in a larger firm, they are dispensable and can be easily replaced.
What is productivity?
A measure of the efficiency of the factors of production.
When productivity falls, what happens to average costs?
They rise.
