3.3.3 economies and diseconomies of scale

What are economies of scale?

Advantages of large scale production which allows large buisnesses to produce at lower avg costs than a smaller business Thus firm is able to experience increasing returns to scale where an increase in inputs by a certain % will lead to a greater % increase in output.

What are diseconomies of scale?

Disadvantages in large businesses as long-run average total cost rises as the quantity of output increases The firm experiences decreasing returns to scale where output increases by a smaller % than inputs.

What is constant returns to scale?

Where firms increase inputs and receive an increase in output by the same %

What is minimum efficient scale?

the minimum level of output needed for a business to fully exploit economies of scale. Point where LRAC curve first levels off and when constant returns to scale is first met.

What is internal economy of scale?

Advantage that form can enjoy because of a growth in the firm, independent of anything happening to other firms or industry in general.

Specialisation EOS

• division of labour and specialisation within production
• with little training can become v productive
• greater efficiency
• ASSEMBLY LINE

Bulk buying EOS

• lower AC for buying large quantities
• due to lower transport costs and less packaging
• why supermarkets are cheaper than corner shops

Marketing EOS

Occur when larger firms lower AC per unit by spreading fixed marketing expenses- such as advertising, campaigns, market research and branding, across higher volume of output Allows companies to achieve greater market presence at lower cost per consumer reached compared to smaller competitor Bulk purchase advertising

Financial EOS

Bigger firm can get better rates of interest than smaller firm

Risk bearing EOS

Some investments are v expensive and risky- this only large firm willing and able to undertake necessary investment

What are technical economies?

Arise as result of what happens to production process. Specialisation, balanced teams of machines, increased dimensions, indivisibility of capital research and development.

What is specialisation in terms of technical economies?

Large firms will be able to appoint specialist workers and buy specialist machines which can do their jobs better and more quickly than unspecialised machines/ workers.

What is balanced teams of machines in terms of technical economies?

Large firms can afford to buy a number of every kind of machine for each stage of production. By combining these machines, they can ensure they run each machine at its optimum level. Smaller comapnies may only be able to afford one macheinary for each step.

What are external economies of scale?

Occur when whole industry grows larger and firms benefit from Lower LRAC—> LRAC shift down on diagram Also referred to as positive external benefits from industrial expansion

Why do external EOS occur?

• cluster effect- firms locate in similar area
• skilled labour- if firms locate in similar area encourages skilled labour to seek work in this area - SILICONE VALLEY SF
• transport links- if mining becomes concentrated in certain area then transport links for shipping goods will develop

External diseconomies of scale

Industry grows in size causing neg externalities and increased LRAS

• perhaps if grows rapidly may cause traffic congestion
• or competition for scarce resources push up cost of labour/ rent/ raw materials