LS4 : Economies and Diseconomies of Scale Flashcards
what is constant returns to scale?
output increases in the same proportions as all inputs. % change in all inputs changes output by the same %
what is increasing returns to scale?
output increases more than in proportion to the increase in all inputs. % change in all inputs increases output by a larger %
what is decreasing returns to scale?
output increases less than in proportion to the increase in all inputs. % change in all inputs increases output by a smaller %
what is the difference between diminishing returns and decreasing returns to scale?
diminishing returns - short run
decreasing returns to scale - long run
why are there no fixed costs in the long run?
there are no fixed inputs, all inputs are variable
why must a firm plan for the long term?
if a firm wants to expand production, it needs to increase fixed inputs otherwise production will run into diminishing returns. eg. labour may exceed the amount they can fit in the available land
what do long-run average total costs represent?
lowest possible average cost (cost per unit of output) when all resources are variable
what does the highest point on the curve show?
marginal revenue is equal to 0
why does the LRAC have a U shape?
due to economies and diseconomies of scale - relating to increasing and decreasing returns to scale
what are economies of scale?
the decrease in the average costs of production over the long run as a firm increases all its inputs
what are the six types of economies of scale?
- technical economies of scale
- managerial economies of scale
- marketing economies of scale
- financial economies of scale
- purchasing economies of scale
- risk-bearing economies of scale
what is technical economies of scale?
cost savings a firm makes as it grows larger, arising from the increased use of large scale mechanical processes and machinery
what is managerial economies of scale?
when large firms spread their administrative and management costs across all their departments. specialist managers gain expertise and experience in that specific area of the business which leads to better decision making abilities
what is marketing economies of scale?
advertising is usually a fixed cost. so this is spread over more units for large firms so the cost per unit is lower as a firm increases its production.
the cost per product of advertising several products may be lower than just advertising one product at a time
what is financial economies of scale?
when a large firm with a strong reputation may be able to raise finance for further expansion compared to small firms. this reinforces market position for larger firms and makes it harder for newcomers to establish themselves.
