UNFINISHED Y13 Booklet 4: Returns & Economies/Diseconomies of Scale Flashcards
(16 cards)
What is the very/ultra-long run?
time period in which at state of technology may change
What is the law of diminishing marginal returns?
when marginal output falls, per additional unit of labour
What is total physical product?
What is marginal physical product?
total units of output
increase in output per additional unit of labour
How can diminishing marginal returns be overcome?
employ more capital (ONLY in the long run)
How does a firm increase in size?
increase employment of any 1 factor of production
How does a firm increase in scale?
increase employment of all 4 factors of production
What is increasing returns to scale?
increase in scale -> more than proportional increase in output
What is decreasing returns to scale?
increase in scale -> less than proportional increase in output
What is constant returns to scale?
increase in scale -> proportional increase in output
What is total return?
What is average return?
What is marginal return?
total - total output of a firm
average - output per unit of input
marginal - output per additional unit of input
What does it mean to economise?
to reduce costs
What are Economies of Scale?
What are the 2 types?
reductions in a firm’s long-run average costs due to an increase in a firm’s scale
operations (internal) or industry (external)
What are the internal Economies of Scale? Definitions?
1) Technical: large firms can afford better machinery & prod. methods
2) Financial: large firms more likely to be loaned more money/lower interest due to better credit history or collateral stock
3) Managerial: large firms hire specialists > general managers
4) Purchasing: large firms find more efficient supply approaches (bulk)
5) Risk-bearing: large firms spread cost of failure across markets
AND reduces costs for firm
What are the external Economies of Scale? Definitions?
1) Geographical Concentration: large industries can build better workforce/infrastructure in certain area, benefits all firms
2) Information: large industries conduct more research & development, benefits all firms
AND reduces costs for all
Why do some firms bulk-sell?
- to attain Economies of Scale (lower avg. costs)
- guaranteed income & customer loyalty
- minimises excess supply, less waste
How can Economies of Scale be shown on a graph? Why?
double Supply shift
1) 1st S shift (e.g., subsidy)
2) increase of Q means production must increase
3) Economies of scale, lowers avg. cost
4) profitability increases, incentive to S increases (2nd shift)
