3.3.3 - economies + diseconomies of scale

define economies of scale

in the long run, as a firm increases output, its long run average total costs will decrease due to the benefits it receives

what is economies of scale an example of

increasing returns to scale - when an increase in inputs leads to a larger than proportional increase in output

define diseconomies of scale

in the long run, as a firm continues to increase output, its long run average total costs will increase at some point

what is diseconomies of scale an example of

decreasing returns to scale - when an increase in inputs leads to a less than proportional increase in output

two types of economies/diseconomies of scale

INTERNAL - increase in firm size

EXTERNAL - increase in industry size

what are the internal economies of scale

“Friendly Managers Make People Think Rationally”

Financial

Managerial

Marketing

Purchasing

Technical

Risk-bearing

financial economies

cheaper loans (less risky than big firms)

managerial economies

large firm = specialised managers = efficiency

marketing economies

large firm = cheaper advertising (when averaged per unit sold)

purchasing economies

bulk buying

technical economies

increased output = use machines to higher capacity

risk bearing economies

larger firm = can decrease risk of failure

what are the internal diseconomies of scale

“Many Cats Get Crazy”

Management

Communication

Geographical

Cultural

management diseconomies

managers working in self interest not the firm’s interest

communication diseconomies

firm too large = communication struggles = inefficiency

geographical diseconomies

widespread bases of operation = logistical + communication challenges

cultural diseconomies 

different cultural norms = culture clash = lack of productivity

show an economies of scale diagram

minimum efficient scale = lowest possible cost per unit

what are the external economies of scale

"Good Teachers Support Firms"

Geographic cluster - industry grows = firms move closer to manufacturers (eg. silicon valley)

Transport links - get people to work in growing industries

Skilled labour - increase in skilled labour lowers cost of skilled labour

Favourable legislation - governments supporting growing industries