Economies and diseconomies of scale Tutor2u

Where a firm eventually experiences a rise in average costs when the level of output exceeds the optimum production quantity of output.

Define diseconomies of scale

The advantages of large scale production that result in lower unit costs or average costs.

Define economies of scale

Occur within an industry or market and from the expansion of it

Define external economies of scale

A given quantity of capital inputs

Each short run average cost curve assumes what ?

- Larger firms are rated more 'credit worthy' by banks and have more favorable rates of borrowing - Smaller firms often have higher rates of interest on overdrafts and loans

Explain financial economies of scale

- Businesses may be left with a lot of spare capacity if market demand is insufficient for economies of scale to be fully exploited

Explain how a lack of market demand is a disadvantage of economies of scale

- Mass production limiting the amount of consumer choice

Explain how the standardization of products is a disadvantage of economies of scale

E-commerce

Give an example of network economies of scale

Lower prices

How can lower costs for a business positively affect the consumer ?

Expensive and specialist capital machinery

Large-scale businesses can afford to invest in what whilst small businesses cannot ?

Productive efficiency

Lower costs by economies of scale are an improvement in what ?

Demand-side economy of scale

Network economies of scale is what type of economy of scale ?

Distribution and transport

The law of increased dimensions (technical economies of scale) is an important scale economy in what industries ?

The path of these short run average cost curves

The long run average cost curve is derived from what ?

An external cost saving

The reolaction of component suppliers and other support businesses close to the main centre of manufacturing is an example of what ?

1. Control 2. Co-operation 3. Loss of control over costs

What are the 3 main reasons for a firm experiencing diseconomies of scale

1. Investing in expensive and specialist machinery 2. Specialization of the workforce 3. The law of increased dimensions

What are the 3 main types of technical economies of scale?

1. Standardization of products 2. Lack of market demand 3. Developing monopoly power 4. Protecting monopoly power

What are the 4 main disadvantages of economies of scale ? reducing welfare of consumers

1. Technical economies of scale 2. Marketing economies of scale and monopsony power 3. Managerial economies of scale 4. Financial economies of scale 5. Network economies of scale

What are the 5 main types of internal economies of scale

A long run average cost curve

What can we use to illustrate economies of scale ?

Gives businesses a competitive advantage

What is a positive effect of lower costs leading to lower prices for businesses ?

- Workers may be less productively efficient in larger firms - Because If workers in a large firm feel that they are not an integral part of a business, their productivity may fall. -This leads to wastage of factor inputs and higher costs

Explain how co-operation can cause diseconomies of scale

- It is imperfect and costly to monitor the productivity and the quality of output from thousands of employees in large corporations

Explain how control can cause diseconomies of scale

- Businesses may use economies of scale to gain monopoly power, leading to higher prices - Leads to a reduction in consumer welfare and a loss of allocative efficiency.

Explain how developing monopoly power is a disadvantage of economies of scale

- Big businesses may lose control over fixed costs - Risk of expensive capital projects involving new technologies to being ineffective and leaving a business with too much under-utilized capital

Explain how loss of control over costs can cause diseconomies of scale

- May be used as a barrier to entry - Existing firms drive prices down if there is a threat of the entry of new suppliers

Explain how protecting monopoly power is a disadvantage of economies of scale

- Form of division of labour - Large-scale manufacturers employ specialists to supervise production systems and oversee human resources

Explain managerial economies of scale (2 points)

- larger firms can spread advertising and marketing budgets over a large output - Larger firms can purchase its inputs in bulk at negotiated discount prices with monopsony power

Explain marketing economies of scale and monpsony power (2 marks)

- The marginal cost of adding one more user is very low - The resulting benefits may be high as each new user to the network can interact and trade will ALL the existing users.

Explain network economies of scale

- Fresh money (extra financial capital) more cheaply through the issue of equities. - Likely to pay a lower rate of interest on new company bonds issued through the capital markets

Financial economies of scale: businesses quoted on the stock market can normally raise what ? (2 points)

Development of R&D facilities in local universities that several businesses in an area can benefit from.

Give one example of external economies of scale

Online auctions and air transport networks

Identify network economies in 2 areas ?

Occurs when a business in a given market or industry reaches the lowest point on its average cost curve implying an efficient use of scarce resources and a high level of factor productivity.

Define productive efficiency