Economies of Scale

Question 1

What is the diseconomies of scale

Answer 1

are the increase in costs that firms incur or experience from being large in size or expanding their scale of production

these disadvantages increase the average cost of production.

Question 2

Economies of scale

Answer 2

The cost advantages (savings) that a firm incurs as it increases its size/scale of production. These advantages decrease the firms average cost.

EOS occur in the long run and are measured by the decrease in the long run average cost curve. u shaped obvi

Question 3

Internal Economies of Scale

Answer 3

benefits to the firm that originate from the organization itself.

Question 4

Examples of internal economies of scale

Answer 4

• Marketing Economies of Scale
• Financial Economies of Scale
• Managerial Economies of Scale
• Research and Development Economies of Scale
• Welfare economies
• Technical Economies
• Economies in the use of labour

Question 5

external econmoies of scale

Answer 5

benefits given to the firm that originate from outside the firm.

Question 6

Examples of external econmoies of scale

Answer 6

Improved infrastructure
Agglomeration
Labour
Use of Waste products

Question 7

diseconomies of scale

Answer 7

the disadvantages that result from the ongoing growth of the organization.

Question 8

Diseconomies of scale examples

Answer 8

Loss of managerial control
Poor Industrial relations
Over Specialisation

Question 9

Marketing economies.

Answer 9

• A large firm can purchase inputs at a lower price than a smaller firm. Larger firms will tend to buy in bulk and secure discounts. As a main customer of the supplier, the firm will be able to communicate directly with the supplier. It can set standards and prices to suppliers.
• The large firm is also able to afford to advertise, thereby increasing sales. This increases market share. For the large firm output is large and advertising costs are spread over a larger output. Therefore,advertising costs per unit are low.

Question 10

Financial economies

Answer 10

• Large firms are considered less risky and are therefore able to secure loans at lower rates of interest than small firms.
• Also, larger firms have more sources of finance; for instance, a public limited company can sell shares on the stock exchange and thereby acquire more funds, unlike a private limited company.

Question 11

Managerial economies

Answer 11

• Large firms are able to employ a greater number of managers and middle managers. The management-to-worker ratio in a large firm might be lower than in a small firm.
• They are also able to attract and pay for the best managers.

Question 12

Research and development economies.

Answer 12

A large firm will have the funds to set up its own research and development department. It will be able to employ top innovators and scientists.

Question 13

Welfare economies.

Answer 13

Large firms can use funds to improve the working conditions and overall welfare of their employees; for example, recreation rooms, canteens with subsidised meals, and free or subsidised health care

Question 14

Technical economies.

Answer 14

Certain types of machinery come in a fixed size. A small firm might underutilise such a piece of machinery, whereas a larger firm with a higher output will use the machinery more efficiently.

• For instance, Mama’s Bakery purchases an industrial oven for $10000. This oven can bake 400 loaves at a time but she only bakes 100 per day. Bunty’s Bakery sells bread to shops all over island and uses this same oven to bake 2 batches of loaves each day. Bunty’s Bakery uses the** capital **more efficiently than Mama’s Bakery.

Question 15

Economies in the use of labour.

Answer 15

As the firm employs more labour, greater division of labour is possible. This leads to greater productivity and increased output.

Question 16

External economies of scale

Improved infrastructure.

Answer 16

Large firms might induce local governments to improve roads, bridges and general infrastructure. All firms in the area will benefit. Firms might indirectly contribute to infrastructure development when they pay fees for planning and building permission.

Question 17

EXTERNAL ECONOMIES OF SCALE

Agglomeration

Answer 17

Large firms might encourage related firms to set up nearby. There is, therefore, a cluster of similar firms that benefit from
each other.

Question 18

external economies of scale

Labour

Answer 18

The clustering of firms encourages the development of a skilled pool of labour.
Workers trained by one firm might shift to another firm nearby, benefiting the firm that did not spend on the training.

Question 19

External Economies of Scale

Use of waste products.

Answer 19

Some firms might use other firms’ waste, or even by-products, in their production process. These firms benefit by locating close to the firm that produces the waste product.

Question 20

Diseconomies of scale

LRAC Curve

Answer 20

When long-run average costs are rising, the firm is experiencing diseconomies of scale.

When long run average costs are falling, the firm is experiencing economies of scale.

LRAC IS U-SHAPED BECAUSE OF ECONOMIES OF SCALE

Question 21

M.E.S

Answer 21

where the LRAC Curve is at its minimum at output level QM, THIS POINT IS KNOWN AS MINIMUM EFFICIENT SCALE OF OUTPUT

Question 22

Diseconomies of scale:
Loss of managerial control.

Answer 22

• As a company grows, it might become difficult to manage effectively. There might be too many levels of management. Communication might not flow freely up and down the organisation. This is common in very large organisations in the private sector, and in government organisations.
• In addition, middle managers are often thought of as being unproductive -and even meddling - especially in government bodies.

Question 23

Diseconomies of scale: Poor industrial relations

Answer 23

**As the company grows, workers become isolated from the management. **This can, for example, lead to half-hearted working, poor-quality output, work stoppages and strikes, as workers do not have a voice in the decision-making process.

Question 24

Diseconomies of scale: Overspecialisation

Answer 24

As workers become more and more specialised, this might lead to **boredom **and reduced quality of work.

In recent, modern management strategy includes allowing workers to see through the entire production line. This is found to increase efficiency and the quality of the product.