Economies and Diseconomies of scale - 3.3.3

What are Technical economies of scale?

Reduced unit costs gained by firms as they increase production due to more efficient use of technology and resources. Automated production reduces the need for manual labour which minimises errors, increases the speed of production and removes the need to pay for salaries.

What are Managerial economies of scale?

Reduced unit costs achieved when larger firms can afford to hire specialised managers to supervise production systems, improving efficiency and productivity.

What are Financial economies of scale?

Reduced unit costs of borrowing that larger firms experience due to negotiate better terms, leading to lower interest rates because of them having financial stability and being more credit worthy.(the banks still benefit as its a large amount borrowed.)

What are Purchasing economies of scale?

Reduced unit costs obtained by larger firms through bulk buying of materials, allowing them to negotiate lower prices from suppliers and benefit from discounts. This is because larger firms have monopsony power.

What are Marketing economies of scale?

Reduced costs per unit achieved by larger firms through more effective advertising and distribution strategies, allowing them to spread marketing expenses over a larger sales output. Their increased sales will lead to increased brand recognition and customer loyalty.

What are Risk-bearing economies of scale?

Reduced unit costs associated with larger firms being able to diversify their products and services, spreading risks across different markets and reducing the impact if one market fails.

Long-run production

A period of time in which a firm can adjust all its inputs (factors of production) to produce a desired level of output.

What happens if a firm experiences increasing returns to scale?

When it increases its production scale (output) by a certain proportion, its average costs per unit of output decrease.

What happens when a firm experiences constant returns to scale?

When it increases its production scale, its average costs per unit of output remain unchanged. Might occur when a firm operates at an optimal scale, and further expansion doesn’t lead to substantial cost reductions..

What happens when a firm experiences decreasing returns to scale?

When it increases its production scale, its average costs per unit of output increases, leading to diseconomies of scale.

What are internal economies of scale?

From within the firm itself, as it expands its own operations in the long run. They result from the firms own actions and decisions.

What are external economies of scale?

Arise from factors outside the firm itself, result from the expansion of the industry the business is part of. They benefit multiple firms within a specific industry or geographical area. Often they are seen in clusters, where businesses in the same industry are in proximity.

What are 3 reasons for external economies of scale?

• Infrastructure economies- If an industry cluster develops, firms can benefit from shared infrastructure (transportation networks)

• Knowledge & Labour pool- in certain regions there might be a concentration of skilled workers and a strong knowledge sharing environment. Firms can tap into a well-trained labour force and access industry specific knowledge.

• Supplier Networks- Clusters of related businesses can lead to a strong supplier network.

What are diseconomies of scale?

Increases in the unit (average cost) of supply in the long run due to decreasing returns to scale. This means a business has moved beyond their optimum size in the long run and are suffering from productive inefficiency.

Causes/ effects of diseconomies of scale

• Organisational slack

• Breakdowns in communication may lead to the departure of highly skilled workers, leading to a loss of human capital for the business.

• Lost cost competiveness could lead to declining market share and a fall in the share price if the business is on the stock market.

What is the Minimum Efficient Scale?

The scale of production where all internal economies of scale have been fully exploited.

Which past of the LRAC curve corresponds to the MES?

The lowest point, where average cost meets marginal cost

When does a natural monopoly occur?

When a single firm can produce a particular good or service at a lower cost than multiple competing firms due to significant economies of scale.

What does the LRAC curve look like for a natural monopoly?

Typically a downward sloping trend over a wide range of output level.