3.3.2.3 - economies and diseconomies of scale

definition of economies of scale

a decrease in LRAC as output increases due to increased factors of production

relationship between long-run cost curves and economies/diseconomies of scale

economies of scale exist when long run ATC decreases. diseconomies of scale exist when long run ATC increases.

what is the minimum efficient scale

the lowest point on the long run average cost curve, and the point at which the firm achieves productive efficiency

distinction between internal/external EOS

internal economies of scale are WITHIN a firm's control.

external economies of scale are NOT in a firm's control. they occur in an industry, and so benefit every firm within it.

acronym for internal EOS

REALLY FUN MOMS TRY MAKING PIES

risk bearing EOS

risks are costs that need to be budgeted for.

large firms can spread risks over a larger output range and lower TC.

financial EOS

large firms can negotiate with banks for lower rates of interest as they are viewed as reliable and profitable, therefore more likely to pay the loan back --> less risk

managerial EOS

large firms can hire managers who can use their skills to boost productivity and output.

however, TC still rises as they must be paid a salary.

technical EOS

large firms can invest in specialist capital to boost productivity and quantity.

however, they may have to hire more workers and have them specialise, therefore TC may rise for wages.

marketing EOS

large firms can bulk-buy their advertising, as well as use more cost-effective ways of advertising, like TV instead of newspapers.

they can also negotiate better rates of advertising.

purchasing EOS

large firms can bulk-buy raw materials to decrease average costs.

they can also negotiate unit discounts and spread costs over a wider range of outputs.

sources of external economies of scale - availability of skilled labour

workers are more likely to flock to areas where industry is growing. this gives firms easier access to skilled labour, making it easier to recruit new workers and reduce training costs.

sources of external economies of scale - access to transport links

reduces total + average costs for large firms as better transport makes it easier and cheaper to access raw materials and move products around.

sources of external economies of scale - sharing knowledge

firms can innovate and share ideas with one another to allow for mutual benefit and the industry to grow

sources of diseconomies of scale - communicaation

as firms grow, it becomes harder to send messages through them as the chain of command is longer, it is time consuming and unclear. this lowers productivity and can increase costs if mistakes are made.

sources of diseconomies of scale - coordination

coordinating different departments to work together becomes more difficult, which can lower productivity

sources of diseconomies of scale - x-inefficiency

x-inefficiency is when a firm is not minimising waste and producing ABOVE the AC curve. waste is a greater risk for large firms, possibly due to overproduction of goods that do not get sold.