LRAC and economies of scale

What is the long run costs?

Where the constraint of a fixed factor does not apply, i.e a firm can make the decision about a new machine

No matter the method of growth…

Firms find themselves moving from one short run scenario to another.

What does the LAC curve look like?

A U Witt the right hand upwards cut off

What does the decreasing part of LRAC curve mean?

As output increases, LRAC decreases, called an economy of scale and leads to falling long run average costs

What does the flat part of the LRAC curve mean?

LRAC are at their lowest, and are constant. Constant returns to scale

What is the increase part of the LRAC curve mean?

That as output increases, LRAC increases, called a diseconomy of scale

What type of curve is LRAC?

Envelope curve, as it envelops all the SRAC curves from different scenarios

What is the minimum efficient scale?

he output at which the optimum level begins

What is a purchasing economy of scale?

Where large firms are able to buy in bulk, especially raw materials and supples, securing a lower cost per unit than a smaller firm

How is a small firm disadvantaged to purchasing economies of scale?

As they require high levels of storage and additional costs which the firm cannot afford, the cannot utilise EOS. Therefore the more you produce, the more you can purchase.

What is a technical economy of scale?

Refers to how using automated equipment is more cost effective than using labour, as they can work 24 hours a day without breaks.

What is the principle of multiples

As most firms use a variety of machines with varying capacity’s to fulfill different functions, they are limited to the output of the machine with the lowest capacity for output

Why dos a firm need to grow with an understanding of principle of multiples?

Firms need to know what machines to buy more of in order to access higher levels of output, as some machines run with spare capacity.

What is the increased dimensions EOS?

We can increase production output by 100%, but this will not cause an increase in costs by 100%

What is a Financial EOS?

Banks/ financial services are more likely to offer a low roi on loan repayments to larger firms than smaller firms,since the larger businesses are lower risk as more financially secure

What is collateral?

Where firms offer assets for a loan

What is a managerial EOS?

In larger businesses, specialists with different roles produce more efficiently, providing lower costs. In smaller usinesses, labour is not divisible, so decreased production

What is an external EOS?

Factors external to the company that can aid in reducing costs

What is the labour external EOS?

A large pool of available labour in a particular area that have been specialised, so firm moves to that area to utilise.

What are ancillary services EOS?

Where there is a wide range of support, and commercial services cluster together to aid an industry i.e. waste disposal

What are diseconomies of scale?

When a firm grows so large, average cost per unit begins to increase

What is the communication fault in larger businesses?

Larger chains of command, so communication gets lost, leading to distortion, and lack of efficiency therefore high CoP