3.3.3 EoS and DoS

What are Eos?

EoS is the fall in LRAC, whilst output increases. The firm experiences increasing returns to scale (rts), where %△ output> %△input

AC= TC⬆/ Q⬆⬆⬆

What is the minimum efficient scale (MES)?

MES is the lowest level of output required to exploit full EoS// lowest level of output whereby the AC curve stops decreasing.

What is an Internal EoS?

Internal EoS= growth in a firm, independent of anything happening to other firms or the industry

What are types of Internal EoS?

Types of Internal EoS=

• risk bearing economies

• financial economies

• managerial economies

• technical economies

• marketing economies

• purchasing economies

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What are risk bearing economies? internal EoS

Risk bearing economies= large companies are able to operate in a range of different markets, producing different products, meaning that if one area of business fails, their whole business will not collapse.

//large companies can spread their risk, which is there o.c, over a larger range of output. So costs are rising but Qty is rising faster. AC ↓

What are financial economies? internal EoS

Financial economies= large firms have greater security as they have more assets and are therefore less likely to be forced out of business overnight. So easier for themm to obtain finance and i/r will be lower due to lower risk: I will be more accessible.

//large firms can negotiate lower i/r when they get a loan from a bank bc the firm is profitable and the bank sees/ thinks there is a lower risk. So costs are rising but can be spread over a larger range of output: Qty is rising faster. AC↓

What are managerial economies? internal EoS

Managerial economies= large companies can afford to appoint specialist managers in every field, who are specialised and so have greater knowledge. Staff represent an indivisibility so small firms can’t employ specialist staff.

// large companies can employ specialist managers and these managers can monitor the productivitiy of the workforce. With their skills, they can help boost productivity in the company. TC is rising as they have to pay them a huge salary, but productivity ↑. AC↓

What are technical economies? internal EoS

Technical economies= these arise as a result of what happens to the production process.

• specialisation: large firms will be able to appoint specialist workers and buy specialist machines which will be able to do their jobs more quickly and better than machines/workers which are not specialised.

• balanced teams of machines= large firms can afford to buy a number of every kind of machine for each kind stage of production. By combining these machines, they can ensure they run each machine at its optimal level. Smaller companies may only be able to afford one machine for each stage and if one stage of production runs faster than the other, machines will spenda long time turned off.

• increased dimensions= if you 2x of the walls, you can 4x area. occurs w/o 2x cost.

• indivisibility of capital= some processes require huge items of machinery and I that make it possible for them to produce on a large scale

• R&D= often large firms can afford to carry out large scale R&D, so able to gain large advantage over their competitor

What are marketing economies? internal EoS

Marketing economies= large comanies can bulk buy their advertising e.g not 1 TV advert. They can negotiate better unit rates of advertising; spread their advertising costs over a larger range of output. AC ↓.

What are purchasing economies? internal EoS

Purchasing economies= large firms are able to bulk buy so may be able to buy their raw materials at a cheaper price than competitors. AC↓

What are external EoS?

External EoS= growth outside business but within industry. These cause LRAC curve to shift downwards.

AC= TC↓/ Q

What are the types of external EoS?

Types of external EoS=

• better transport infrastructure

• Component suppliers move closer

• R&D move closer

Why is better transport infrastructure an external EoS?

Better transport infrastructure= large companies will see better transport infrastructure e.g new roads. So ↓ costs, cheaper costs for access to raw materials, so TC ↓ so AC ↓

Why is component suppliers moving closer an external EoS?

Component suppliers move closer= large companies become closer, so cuts down the cost of transporting raw materials so TC ↓ so AC ↓

Why is R&D firms moving closer an external EoS?

R&D firms move closer= large firms can use that R&D, improve technology and ↓ TC so AC ↓.

Firms are able to hire staff who have been trained by other businesses, cheaper and more efficient for firm than training the workers themselves.

What are DoS?

DoS is the increase in LRAC, whilst output increases. The firm experiences decreasing rts, where %△output<%△input.

AC= TC⬆⬆⬆/q⬆

What are the types of DoS?

Types of DoS=

• coordination

• communication

• control

• motivation

Why is coordination a DoS?

Coordination of a multinational company producing different parts of a car arund the world is much more difficult than coordinating and controlling the work of a local garage. This could lead to poorer quality to work and business decisions which do not work well together.

Why is communication a DoS?

Communication= with a large business, communication can be slow and lose accuracy bc of the distance and the number of ppl it has to be passed through.

Why is control a DoS?

Control= large companies would make it difficult for managers to control the workforce as there is so many workers. Workers are more likely to slack off, impact on productivity. So TC ↑ faster than Qty so AC ↑

Why is motivation a DoS?

Motivation= large businesses, workers can think their efforts go unnoticed and have less chance of promotion so lose motivation and work less hard. They can also lose their personal committment and identification with the business.

Productivity ↓ in the company, so costs ↑ faster than Qty, so AC ↑