3.3.3 Economies and diseconomies of scale

Do Economies of scale occur in the SR to the LR

EOS occur in the LR as LRAC fall as a result of increased scale of production

What are economies of scale

When per unit cost fall as a result of greater output.

What are external EOS

External EOS occur when LRAC fall for a firm as a result of of growth in their entire industry. They are out of the control of a firm

What are some examples of external EOS

Component suppliers move closer decrease shipping cost

R+D firms move closer allowing you to use there advancements to reduce costs

What are internal EOS

Internal EOS occur when LRAC fall for a firm as a result of the firms own growth

What are the 5 types of internal EOS and the acronym to remember them

Risk, Financial, Managerial, Technical, Marketing (commercial). Really Fun Mums Try Making Pies.

What are risk bearing economies of scale

Risk is a cost to firms but as they expand and grow this risk can be spread over a greater range of output

What are financial economies of scale

Larger firms can issue share on the stock market allowing them to gain favourable loans and borrow at lower interest rates thanks to there collateral

What are managerial economies of scale

As a firm gets bigger they can hire more specialist managers to monitor and boost worker productivity.

What are technical economies of scale

As a firm grows it has more capital to invest in more specialist machinery and tech allowing for greater productivity and lower cost per unit.

What are marketing (commercial) economies of scale

Larger firms can bulk buy this allows them to decrease there cost per unit as they grow.

How does EOS decrease AC

While TC are still increasing as a firms increases its output the number of units its producing increases more resulting in a lower cost per unit or a lower AC

What are diseconomies of scale

When a firm grows so much that a its cost per unit increases

What are the for reasons for diseconomies of scale

3 C’s and an M. Control, Communication, Coordination and Motivation.

What are control diseconomies of scale

As a firm grows it becomes harder for managers to control the work force so productivity falls

What are communication economies of scale

Messages take longer to get from the stop to bottom of vice versa this divide cause productivity to fall

What are coordination economies of scale

Larger firms have a harder time coordinating all their different departments causing a drop in productivity

What are motivation diseconomies of scale

Larger firms the less important the worker feel so lack motivation and this hurts productivity

What is the minimum efficient scale of production

The lowest level of output needed to be productively efficient ( if high can act as a barrier to entry)