Long Run Costs

Question 1

What is the Economies of Scale?

Answer 1

There can be cost advantages when operating at a larger scale known as economies of scale

EoS = falling long run average costs (LRAC)

Question 2

What are Internal Economies of Scale?

Answer 2

Internal economies of scale arise because of the growth in output of the firm itself as it expands its own operations; efficiencies in production are gained reducing LRAC

Question 3

Examples of Internal EoS?

Answer 3

Technical EoS = use of specialised equipment, automated manufacturing; law of increased dimensions e.g. containerisation,

Purchasing EoS = lower price per unit from bulk buying, larger firm can use its monopsony power

Managerial EoS = using specialist staff, a form of the division of labour, e.g. specialist production manager

Financial EoS = bigger firms are often less risky and can get bigger loans at lower interest rates than smaller firms

Risk-bearing EoS = larger firms can diversify to spread risk; makes business more resilient to changes in market conditions

Question 4

What are External Economies of Scale?

Answer 4

External economies of scale arise from factors outside the firm because of the growth in the size of the industry or the business environment in which the firm operates, reducing LRAC for individual firms (small or large)

Question 5

What are some examples of External Economies of Scale?

Answer 5

Infrastructure = industries cluster geographically to benefit from shared infrastructure,

e.g. Media City in Salford; fishing industry in Grimsby

Knowledge & labour pool = in some regions there may be a strong knowledge sharing environment

e.g. City of London, Cambridge Uni & Science Park

Supplier networks = clusters of related businesses can lead to a strong supplier network

e.g. specialised components in automotive industry

Question 6

What is the Minimum Efficient Scale?

Answer 6

MES: the lowest output where the firm is at the lowest point on the LRAC the business achieves productive efficiency.