Long run costs

What is scale?

Refers to the size/productive capacity of a firm.

How does a firm increase its scale?

By increasing its factor inputs/factors of production.

What are internal economies of scale (EoS)?

The beneficial effects of a firm increasing the size of its operations, resulting in lower long run unit costs.

What are internal diseconomies of scale (DoS)?

The negative effects of a firm increasing the size of its operations, resulting in higher long run unit costs.

In the long run are the FOPs variable or fixed?

They are all variable.

What does the LRAC curve show?

The least cost method of producing each level of output when all factors are free to vary.

What is the minimum efficient scale (MES)?

The level of output where LRAC cease to fall, it is the lowest output at which the firm is productively efficient.

What is the formula for unit costs?

Total costs/Output

Internal economies of scale: The principle of increased dimensions

This is a technical economy. the capacity of a container increases more than proportionately to the quantity of material used to construct it.

Internal economies of scale: Opportunities to employ specialist managers

This is a managerial economy, where the employees are more efficient and output will increase more than costs.

Internal economies of scale: Bulk buying

This is a marketing economy, discounts are given with large orders as suppliers experience a cost saving in dealing with fewer bulk orders rather than many small ones, they will also have better bargaining powers.

Internal diseconomies of scale: Loss of co-ordination

A firm becomes difficult to organise the bigger it gets, this is likely to lead to costly mistakes and a much slower response to changing market conditions.

Internal diseconomies of scale: Excessive bureaucracy

Larger firms tend to be more formal in their organisation, having more rules and regulations can lead to higher administration costs.

Internal diseconomies of scale: Problems with motivation

Larger firms are less personalized and workers may feel they are not treated as an individual and are far removed from the management, if workers feel demotivated productivity declines.

Why might firms only increase output in the short run?

• Finance unavailable to expand capacity

• Depends upon business confidence

What causes an upward shift of the LRAC curve?

An increase in factors prices, indirect taxes and external diseconomies of scale.

What causes a downward shift of the LRAC curve?

A decrease in factor price. indirect taxes, improvements in technology and external economies of scale.

What are external economies of scale?

The beneficial effects of the industry in which a firm operates increasing in size resulting in a downward shift of the LRAC curve.

What are external diseconomies of scale?

The negative effects of the industry in which a firm operates increasing in size resulting in a upward shift of the LRAC curve.

External economies of scale: Technological economies

Results from increased efficiency due to a new application used in the production process.

External economies of scale: Lower costs of input

As an industry expands firms in related industries may be subject to internal economies of scale.

External economies of scale: Concentration economies

When firms in the same industry cluster in a particular geographical area this often leads to the development of a range of specialised local services.

External diseconomies of scale: Higher costs of inputs

It is possible that as an industry grows unit costs will rise, more firms in an industry leads to greater competition for resources which pushes prices up.

External diseconomies of scale: Concentration diseconomies

When firms cluster in a geographical area this can lead to overcrowding and overuse of the transport system in the local area etc.