4.5 Economies and diseconomies of scale

economies of scale

as output increases LRAC falls

Economies of scale definition

The cost advantages a firm gains due to the scale of their production

diseconomies of scale

as output increases, LRAC increases

internal EoS defenition

Changes in LRAC due to sn increase in scale or size within a firm

external EoS defenition

Change in LRAC due to growth of the market or industry that a firm is part of

types of internal EoS

Managerial EoS - more specialist managers

Marketing EoS - bulk buying, negotiating power, spread advertising costs

Technical EoS - spread R&D costs, capital/volume economies

types of internal DEoS

managerial DEoS - administration difficulties, inefficient lower level managers

communication failure - disconnect between low and high level staff - unawareness also workers feel unappreciated → lower productivity

Divorce of ownership and control

motivational DEoS

relationship between RtS and EoS

increasing returns to scale results in economies of scale

external EoS and DEoS

EoS - cluster effects ie silicon valley → supply of skilled labour, attract supporting industries, sharing of knowledge and ideas

DEoS - increased demand for labour or other FoP put upward pressure on prices and drive up wages

example of external EoS

Silicon Valey → hotspot for IT firms

→ skilled workers are attracted to illicon Valey → Firms have to spend less time searching for qualified workers

relationships between nearby univerities and firms → eg Stanford

→ attracts investment → In 2024 Venture capital investments in Silicon Valley was $65 bn +

what market structure has an L shaped LRAC

natural monopoly

why is the L shaped LRAC curve L shaped

High fixed costs and low marginal costs → large economies of scale

constand returns to scale after the minimum efficient scale of production is reaches

what is the minimum efficient scale of production

the smallest output that is at the lowest possible point on LRAC

impact of a high MES on the structure of markets

high MES relative to demand → monoloply or oligopoly

→ high barriers to entry as large outputs are required to operate efficiently → only a few firms can do this

impact of a low MES on market structre

low MES relative to demand → more competetive makrets

→ lower barriers to enty as a firm can produce small outputs and still opperate efficiently → lots of firms can achieve this