LS4 - Economies & Diseconomies Of Scale

Question 1

what can happen in the long run when firm changes inputs

Answer 1

• constant returns to scale
• increasing returns to scale
• decreasing returns to scale

Question 2

increasing returns to scale

Answer 2

• if a firm doubles inputs and outputs more then double
• output increases more than in proportion to the increase in all inputs
• given a percentage increase in all inputs outputs increase by a larger percentage

Question 3

constant returns to scale

Answer 3

• when inputs double so does output
• output increases in the same proportion as all inputs
• given a percentage change in all inputs, output increases by a larger percentage

Question 4

decreasing returns to scale

Answer 4

• if a firm doubles inputs and output increases by less then double
• decreasing returns to scale - output increases less than in proportion to the increase in inputs
• given a percentage change in inputs, outputs increases by a smaller percentage

Question 5

difference between diminishing and decreasing returns

Answer 5

diminishing returns is in the short run and decreasing returns is in the long run

Question 6

LRATC represents

Answer 6

• lowest possible average costs when all resources are variable

Question 7

reasons for LRAC curve shape

Answer 7

• -ve gradient where increasing economies of scale
• when straight line constant returns of scale
• when +ve gradient decreasing returns to scale

Question 8

types of economies of scale

Answer 8

• technical
• managerial
• marketing
• financial
• purchasing
• risk-bearing

Question 9

technical economies of scale

Answer 9

• some capital equipment is designed for large-scale production
• tech can make large-scale production more efficent/productive
  e.g storage of container increases proportionally larger then surface area so cost of storage falls

Question 10

managerial economies of scale

Answer 10

• large firms employ managers to take care of different areas of business that they have expertise in
• no of mangers usually doesn’t depend on production scale, reduces cost per unit
• firms can get too large so hard for managers to manage - likely to be diseconomies of scale

Question 11

marketing economies of scale

Answer 11

• advertising is usually a fixed, so as more units cost is spread out
• larger firms have brand awareness and is well known so don’t have to advertise as much

Question 12

financial economies of scale

Answer 12

• large firms with good rep may be able to raise finance for expansion on more favourable terms compared to a small firm
• reinforces market position and makes it harder for small firms to establish themselves

Question 13

purchasing economies of scales

Answer 13

• when a firm is large it will purchase inputs on a large scale e.g. raw materials, energy and transport
• when bulk buying may get a better deal reducing average cost as output increases

Question 14

risk-bearing economies

Answer 14

• larger firms can diversify into different markets
• if demand for one product falls it’s likely another products demand increases
• firms can take more risks as if unsuccessful then other activities/products can absorb failure more easily

Question 15

what is an economy of scale

Answer 15

decreases in average costs of production over the long run as a firm increases all its inputs

Question 16

what is an diseconomy of scale

Answer 16

increases in average costs of production as a firm increases its output by increasing all inputs

Question 17

reasons for diseconomies of scale

Answer 17

• co-ordination and monitoring difficulties
• communication difficulties
• poor worker motivation

Question 18

co-ordination and monitoring difficulties

Answer 18

as a firm gets larger then management may find it hard to co-ordinate and organise operations and monitoring causing inefficiencies to increase and higher average costs

Question 19

communication difficulties

Answer 19

larger firm may find it harder to communicate between different departments increasing inefficiencies and higher average costs

Question 20

poor worker motivation

Answer 20

if workers lose motivation they become less efficient with costs per unit of output increasing