Theme 3.3.3

Question 1

Define internal economies of scale

Answer 1

The cost advantages a firm experiences as it increases its own scale of production.

A reduction in LRAC as output increases

Question 2

Define external economies of scale

Answer 2

Cost advantages gained by the entire industry growing or clustering together

Question 3

Describe diseconomies of scale

Answer 3

Increase in LRAC as output increases (occurs when firms become big)

When average cost per unit is rising in the long run

Question 4

Describe minimum efficient scale

Answer 4

Lowest output level require to exploit full E.O.S (where AC stops decreasing at Q*)

Question 5

Name the types of internal economies of scale

Answer 5

Risk bearing
Managerial
Financial
Purchasing
Technical
Marketing

AC= TC⬆️/Q⬆️⬆️⬆️

Question 6

What is involved with external economies of scale

Answer 6

Better transport infrastructure

Competent suppliers move closer

R&D firms move closer

AC= TC⬇️/Q

Question 7

What is involved with diseconomies of scale

Answer 7

Control
Communication
Coordination
Motivation

AC= TC⬆️⬆️⬆️/Q⬆️

Question 8

Which type of E.O.S is present when average cost per unit is rising in the long run

Answer 8

Diseconomies of scale

Question 9

Which type of E.O.S is present when average cost per unit is falling in the long run

Answer 9

Economies of scale

Question 10

What are the advantages of external economies of scale

Answer 10

Large labour pool- reduced cost in requirement & training staff

Shared cost of R&D

Reduces marketing cost

Question 11

What happens to the AC equation when a firm is experiencing internal economies of scale

Answer 11

TC rises and Q rises much faster = AC decreases

Question 12

What happens to the AC equation when a firm is experiencing diseconomies of scale

Answer 12

TC is rising faster than the rise in Q

Question 13

What happens to the AC equation when a firm is experiencing external economies of scale

Answer 13

TC is falling

Question 14

Average cost formula

Answer 14

TC/Q

Question 15

Describe the following type of internal economies of scale : managerial

Answer 15

As a firm gets larger they can employ specialist managers, who monitor workforce productivity and boost it + bring in their specialist skills to boost productivity.

TC will be rising because we employ the managers and we pay them a salary but productivity (Q) will be rising faster than TC= fall in AC.

Question 16

Describe the following type of internal economies of scale : Technical

Answer 16

As a firm gets larger specialist machinery is brought in which increases cost but boosts productivity- a firm using factory more efficiently, employing more workers and making them specialise = boosts productivity .

Qty rises faster than TC = fall in AC

Question 17

Describe the following type of internal economies of scale : Purchasing

Answer 17

As a firm grows it buys lots of raw mats and buys in bulk by negotiating unit discounts. Q rises faster than TC as costs are spread over a wider output range = fall in AC

Question 18

Describe the following type of internal economies of scale : Marketing

Answer 18

A larger company can bulk buy their advertising e.g bulk magazine adverts - as a result they negotiate better unit rates of advertising and can spread their advertising costs over a large output range - TC rises slower than Q = fall in AC

Question 19

Describe the following type of internal economies of scale : Financial

Answer 19

As a business gets larger they can negotiate lower interest rates when they get a bank loan. As the firm is reputable , the bank thinks they’re lower risk and they negotiate a lower interest. Costs are spread over a larger output range = fall in AC

Question 20

Describe the following type of internal economies of scale : Risk Bearing

Answer 20

Risks are a cost but as a business gets larger they spread it (which is an OC) over a larger output range = fall in AC

Question 21

Describe the following type of external economies of scale : Better transport infrastructure

Answer 21

New roads, railways, airports build around a business as it gets larger . It reduces business cost as it’s cheaper for you to sell your goods and access raw mats and components- TC decreases = reduces AC

Question 22

Describe the following type of external economies of scale : Component suppliers move closer

Answer 22

It’s in the supplier’s interest to be close to bigger firms which costs the cost of transporting component raw materials = TC decreases= reduces AC

Question 23

Describe the following type of external economies of scale : R&D firms move closer

Answer 23

Big firms can use their R&D, improve tech and reduce TC= reduces AC

Question 24

Describe the following type of diseconomies of scale : Control

Answer 24

As a business gets larger it becomes difficult for managers to control the workforce . If workers know this they won’t be as productive = TC rises faster than Q = AC increases

Question 25

Describe the following type of diseconomies of scale : Coordination

Answer 25

It’s harder to spread messages over a bigger firm e.g workers may have great ideas to improve the efficiency of the business but can’t spread their messages quickly to those at the top. It takes take and effort (wasteful of messages take long to be received or are unclear) = TC rises faster than Q = increases AC

Question 26

Describe the following type of diseconomies of scale : Coordiantion

Answer 26

To ensure all departments are working in the same way is difficult as the business is bigger = productivity suffers= TC rises faster than Q= increases AC

Question 27

Describe the following type of diseconomies of scale : Motivation

Answer 27

As a business gets larger and there’s more workers, each worker feels less valued/dispensable = affects motivation = reduces productivity = TC rises faster than Q= increases AC