Economics - 3.3.3 - Economies and diseconomies of scale - A Level

External economies of scale

Falling average costs of production, shown by a downward shift in the average cost curve, which result from a growth in the size of the industry within which the firm operates.

Optimum level of production

The range of output over which long run average cost is lowest.

Internal economies of scale

Economies of scale which arise because of the growth in the scale of production within a firm.

Causes of shifts in the LRAC curve

- Industry wide changes shift the LRAC curve, for instance an increase in the price of raw materials across the economy would shift it up, and a fall in wage rates would shift it down. - External economies of scale, which arise when there is a growth in the size of an industry within which a firm operates, reducing costs to individual firms. - Taxation across an industry. - Technology improving and making firms more efficient (the LRAC curve assumes constant technology). - External diseconomies of scale.

Economies of scale

A fall in the long run average costs of production as output rises (e.g. treble output but only double costs).

Diseconomies of scale

A rise in the long run average costs of production as output rises (e.g. double output but quadruple costs).

Sources of diseconomies of scale

Diseconomies of scale generally arise because of management problems and bloatedness. Geography can also play a factor, for instance in communication between different branches of an MNC.

Sources of economies of scale: Financial economies

Small firms are often given higher interest rates than big ones, so find it hard to secure stable investment and pay back loans.

Sources of economies of scale: Technical economies

Technical economies occur with increasing or decreasing returns to scale, arising as a result of what happens in the production process. This can occur with such things as *indivisibility* (e.g. a builder needs to buy a cement mixer but only uses it 3 days a week). The larger the level of output, the less likely it is that indivisibilities will occur.

Minimum efficient scale (MES) of production

The lowest level of output at which long run average cost is minimised.

Sources of economies of scale: Purchasing and market economies

This means being able to buy goods in bulk, along with increased buying power, allowing larger firms to secure lower prices for factor inputs.

Sources of economies of scale: Managerial economies

This means specialisation; since small businesses are very small, they cannot hire individual people to be accountants, receptionists, etc., so one person does many different jobs, making the process less efficient (staff represent an indivisibility).