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Define short-run
Where at least one FOP is fixed - business growth is limited by factor inputs
Define long-run
Where all FOP are variable - business growth is limited by other factors
Define economies of scale
Describes falling average costs as firms grow (cost benefits bigger firms may benefit from)
Define diseconomies of scale
Describes rising average costs as firms grow
Define internal economies of scale
How average costs change as a firm grows
Define external economies of scale
How average costs change as other firms grow
Name 8 internal economies of scale
1. Monopsony buying power
2. Financial
3. Risk-bearing
4. Marketing
5. Managerial
6. Containerisation
7. Technical
8. Regulatory
What is monopsony buying power as an internal economies of scale?
Larger firms are able to negotiate lower prices from suppliers / lower wages through their monopsony power
What are financial economies of scale?
Larger firms are able to borrow more and at lower interest rates (less risk for lender and collateral to secure the loan)
What are risk-bearing economies of scale?
Larger firms can take more risks (costs) as any mistake is spread out over whole company and chance of bankruptcy is relatively small
Can also diversify
What are marketing economies of scale?
National advertising campaign - more people see the ads
What are managerial economies of scale?
In SR, division of labour can increase productivity and therefore reduce LRAC
What are containerisation as an internal economies of scale?
Larger firms can take advantage of 'square-cube law'
What are technical economies of scale?
Larger firms can invest in high fixed cost capital goods that will be able to reduce AC
What are regulatory economies of scale?
Larger firms can lobby regulators and governments to get preferential treatment
What does the economies of scale graph look like?
Give 6 internal diseconomies of scale
1. Principal-Agent problem
2. Monopoly power
3. Regulatory oversight
4. Motivation
5. Communication/Coordination
6. Cannibalisation
What is the Principal-Agent problem?
The larger the firm, the larger the distance between ownership and control and the less oversight there is of workers' productivity
Explain monopoly power as an internal diseconomy of scale (3)
- Larger firms face less competition and therefore can afford to waste resources due to complacency/arrogance.
- Don't have incentive to be efficient, don't need to be cost efficient.
- This waste is referred to as x-inefficiency.
Explain regulatory oversight as an internal diseconomy of scale (2)
- Larger firms are a greater risk of regulatory/government intervention and fines
- High compliance costs
Explain communication/coordination as an internal diseconomy of scale (2)
- Harder to communicate across departments, locations, countries.
- Language barriers + time zones = difficult
Explain cannibalisation as an internal diseconomy of scale (2 )
- Large companies end up competing against themselves, e.g. Apple and Kelloggs.
- Costs rise but revenue stays the same. Rise in COP > rise in profit
What does the diagram for external economies of scale look like?
What does the diagram for external diseconomies of scale look like?
Give 3 external economies of scale
1. Geographical
2. Human capital
3. Technological
Explain geographical as an external economy of scale
Firms can cluster together and take advantage of better pooled infrastructure
Explain human capital as an external economy of scale
Decrease training cost when workers in rival firms have been trained and then poached
Explain technological as an external economy of scale (3)
- Free-riding is possible, even with patents/IP rights
- 'Second-mover' advantage
- e.g. Boeing failed at this when they tried to reverse engineer
Give 3 external diseconomies of scale
1. Competition
2. Tax/Regulatory
Explain competition as an external diseconomy of scale (2)
- Crowding out of FOP (costs rise)
- Firms compete and bid up for factor inputs
Explain tax/regulatory as an external diseconomy of scale
Larger industries at greater risk of government regulation and taxation
What is MES?
- Minimum Efficient Scale
- The smallest a firm can be whilst being productively efficient
Define short-run
Where at least one FOP is fixed - business growth is limited by factor inputs
Define long-run
Where all FOP are variable - business growth is limited by other factors
Define economies of scale
Describes falling average costs as firms grow (cost benefits bigger firms may benefit from)
Define diseconomies of scale
Describes rising average costs as firms grow
Define internal economies of scale
How average costs change as a firm grows
Define external economies of scale
How average costs change as other firms grow
Name 8 internal economies of scale
1. Monopsony buying power
2. Financial
3. Risk-bearing
4. Marketing
5. Managerial
6. Containerisation
7. Technical
8. Regulatory
What is monopsony buying power as an internal economies of scale?
Larger firms are able to negotiate lower prices from suppliers / lower wages through their monopsony power
What are financial economies of scale?
Larger firms are able to borrow more and at lower interest rates (less risk for lender and collateral to secure the loan)
What are risk-bearing economies of scale?
Larger firms can take more risks (costs) as any mistake is spread out over whole company and chance of bankruptcy is relatively small
Can also diversify
What are marketing economies of scale?
National advertising campaign - more people see the ads
What are managerial economies of scale?
As in the short-run, division of labour can increase productivity and therefore reduce LRAC
What are containerisation as an internal economies of scale?
Larger firms can take advantage of 'square-cube law'
What are technical economies of scale?
Larger firms can invest in high fixed cost capital goods that will be able to reduce AC
What are regulatory economies of scale?
Larger firms can lobby regulators and governments to get preferential treatment
What does the economies of scale graph look like?
Give 6 internal diseconomies of scale
1. Principal-Agent problem
2. Monopoly power
3. Regulatory oversight
4. Motivation
5. Communication/Coordination
6. Cannibalisation
What is the Principal-Agent problem?
The larger the firm, the larger the distance between ownership and control and the less oversight there is of workers' productivity
Explain monopoly power as an internal diseconomy of scale (3)
- Larger firms face less competition and therefore can afford to waste resources due to complacency/arrogance.
- Don't have incentive to be efficient, don't need to be cost efficient.
- This waste is referred to as x-inefficiency.
Explain regulatory oversight as an internal diseconomy of scale (2)
- Larger firms are a greater risk of regulatory/government intervention and fines
- High compliance costs
Explain communication/coordination as an internal diseconomy of scale (2)
- Harder to communicate across departments, locations, countries.
- Language barriers + time zones = difficult
Explain cannibalisation as an internal diseconomy of scale (2 )
- Large companies end up competing against themselves, e.g. Apple and Kelloggs.
- Costs rise but revenue stays the same. Rise in COP > rise in profit
What does the diagram for external economies of scale look like?
What does the diagram for external diseconomies of scale look like?
Give 3 external economies of scale
1. Geographical
2. Human capital
3. Technological
Explain geographical as an external economy of scale
Firms can cluster together and take advantage of better pooled infrastructure
Explain human capital as an external economy of scale
Decrease training cost when workers in rival firms have been trained and then poached
Explain technological as an external economy of scale (3)
- Free-riding is possible, even with patents/IP rights
- 'Second-mover' advantage
- e.g. Boeing failed at this when they tried to reverse engineer
Give 3 external diseconomies of scale
1. Competition
2. Tax/Regulatory
Explain competition as an external diseconomy of scale (2)
- Crowding out of FOP (costs rise)
- Firms compete and bid up for factor inputs
Explain tax/regulatory as an external diseconomy of scale
Larger industries at greater risk of government regulation and taxation
What is MES?
- Minimum Efficient Scale
- The smallest a firm can be whilst being productively efficient
