Economies of scale

Define economies of scale

When an increase in scales of production/TQ decreases LRAC

Define internal economies of scale

• When an increase in scales of production/TQ within a business decreases LRAC

• Furthermore, TQ increases at a greater rate than TC, suggesting LRAC decreases

Define managerial economies of scale

An internal economy of scale, where employing specialist managers to monitor the workforce, ensures workers don’t slack, increasing productivity/TQ

Define technical economies of scale

An internal economy of scale, where employing specialist machinery and workers increase productivity/TQ, decreasing ATC

Define purchasing economies of scale

An internal economy of scale, where bulk-buying increases a firm’s bargaining power to negotiate discounted products, decreasing AVC

Define marketing economies of scale

An internal economy of scale, where bulk-buying advertising allows a firm to spread their TFC across greater output, decreasing AFC

Define financial economies of scale

An internal economy of scale, where a larger firm that produces at a large scale is perceived as more reputable and lower risk to banks, decreasing interest rates on loans, decreasing AFC

Define risk bearing economies of scale

An internal economy of scale, where a larger firm with a relatively diversified portfolio can afford to take greater risks without significant threats to business survival, decreasing AFC

Define external economies of scale

• When an increase in scales of production/TQ due to industry growth or the location it operates in decreases LRAC

• Furthermore, TC decreases, suggesting LRAC decreases

Define transport infrastructure economies of scale

An external economy of scale, where better roads allow transport to be quicker, decreasing raw material distribution costs, decreasing AVC

Define supplier economies of scale

An external economy of scale, where component suppliers move closer because it’s in their best interest, decreasing raw material distribution costs, decreasing AVC

Define research and development economies of scale

An external economy of scale, where R&D firms move closer because it’s in their best interest, decreasing internal R&D costs, decreasing AFC

Define diseconomies of scale

• When an increase in scales of production/TQ within a business increases LRAC

• Furthermore, TC increases at a greater rate than TQ, suggesting LRAC increase

Define control disconomies of scale

An internal diseconomy of scale, where managers struggle to control the workforce, incentivising workers to minimise their supply of labour, decreasing labour productivity/TQ, increasing ATC

Define communication diseconomies of scale

An internal diseconomy of scale, where it takes longer for managers to spread messages to subordinates, decreasing labour productivity/TQ, increasing ATC

Define co-ordination disceonomies of scale

An internal diseconomy of scale, where different departments struggle to coordinate together, decreasing labour productivity/TQ, increasing ATC