internal economies of scale

Question 1

what are internal EOS?

Answer 1

internal EOS are lower average costs due to cost savings that firms enjoy when they expand their scale of production, and hence output

Question 2

what is the lowest point on the LRAC known as?

Answer 2

the minimum efficient scale, which is where the average cost of production is the lowest

Question 3

what is the minimal efficient scale?

Answer 3

it is the point where the LRAC stops falling, meaning that all internal economies of scale have been exhausted

Question 4

what is technical iEOS?

Answer 4

technical EOS are cost-savings arising from the production process

Question 5

what are the 2 forms of technical iEOS?

Answer 5

• specialization and or division of labour

- non-divisible inputs

Question 6

why are firms able to reap more iEOS when it engages in the specialization & division of its labor?

Answer 6

• this is because as the output level of a firm increases, it would have to employ more workers
• with a larger number of workers, firms can re-organize the workers in a way that allows each worker to specialize in a different task
• this results in an increase in labor productivity arising from the familiarity of repeated tasks, time saved from not having to change tools & locations within the factory to perform each task

Question 7

which company popularized the widespread use of the assembly line method of production?

Answer 7

• the Ford Motor Company in the production of its Model-T, as the workers had highly specialized roles, with different workers being in charge of different parts of the assembly, which saw the time spent assembling 1 car to fall from 13 hours to 1.5 hours
• this allows each worker to improve their skills in a single part of the process so that they can complete their task in the least possible time, increasing the overall productivity
• thus, the cost per unit of output falls, thus contributing to a lower AC

Question 8

why do larger firms have greater financial iEOS?

Answer 8

• this is because larger firms typically have more assets & greater stability, hence, they tend to incur lower borrowing costs from banks

Question 9

why do large firms enjoy managerial iEOS?

Answer 9

• as large firms typically have more complication business operations, they can justify the hiring of specialized managers in different parts of its business
• delegation of overseeing the business to managers enables top management to focus on long term strategic planning, resulting in higher output with the same cost, contributing to a lower LRAC

Question 10

why do large firms enjoy marketing iEOS?

Answer 10

• when a firm’s output is large, it will have to buy more inputs for its production process
• this often gives the firm added bargaining power to bring down the price of these inputs they pay to their suppliers
• with a lower input price, the marginal cost of producing another unit will fall, hence, average cost of production will fall