Economies and Diseconomies of Scale

What are economies of scale?

Economies of scale occur when a firm’s average costs of production decrease as it produces more output.

What happens to average costs as a firm experiences economies of scale?

Average costs decrease as production increases.

What are the two main categories of economies of scale?

Internal economies of scale and external economies of scale.

What are internal economies of scale?

Cost advantages that a firm can achieve by increasing its production within the firm.

What is an example of technical economies of scale?

A large bakery using an automated conveyor system to reduce production time and labor.

How do external economies of scale differ from internal economies?

External economies occur due to factors outside the firm, often from industry growth or economic improvements.

What factor contributes to agglomeration economies?

Firms clustering together in the same area, benefiting from shared services and access to suppliers.

What are diseconomies of scale?

Diseconomies of scale occur when a firm grows too large, leading to increased average costs per unit.

What is a major issue associated with diseconomies of scale?

Control problems, where it becomes difficult to manage effectively as a firm grows.

What is the significance of the long-run average cost curve (LRAC)?

It illustrates the relationship between a firm’s output and its average cost in the long run.

What does the downward sloping section of the LRAC curve represent?

Economies of scale, where increasing production lowers average costs.

What does diminishing returns to scale refer to?

When increasing input results in smaller proportional increases in output as production expands.

What are increasing returns to scale?

When output increases by a greater proportion than inputs.

What is the difference between diminishing returns to scale and diseconomies of scale?

Diminishing returns to scale focuses on production efficiency, whereas diseconomies of scale are about increasing costs per unit due to growth.

In the context of a clothing factory increasing production, what indicates diminishing returns?

Producing only 1,500 shirts after doubling inputs instead of 2,000.

What real-world example illustrates diminishing returns in the airline industry?

An airline expanding its fleet without adequate coordination, leading to inefficiencies despite more planes.

Economies of scale help to reduce __________ costs as production increases.

average

An example of __________ economies of scale is a firm using specialized machinery.

internal

When firms benefit from being located close to suppliers, this is known as __________ economies.

agglomeration

Diseconomies of scale often lead to increased __________ costs.

average

The long-run average cost curve (LRAC) illustrates how average costs behave as __________ changes.

output

When larger production leads to inefficiencies, it is indicative of __________ returns to scale.

diminishing

External economies of scale typically arise due to __________ improvements in the economy.

economic

__________ problems arise when managing a firm becomes challenging due to its size.

Control

In the context of a company expanding production too quickly, __________ returns to scale may occur.

diminishing

__________ economies of scale occur within the firm and are due to its own actions.

Internal