Micro 9 - Economies and Diseconomies of Scale

Question 1

Economies of Scale - definition

Answer 1

> When a firm benefits from reduced average costs as it increases its capacity.

Question 2

Diseconomies of Scale - definition

Answer 2

> When a firm suffers from increasing average costs as it increases its capacity.

Question 3

Increasing Returns to Scale - definition

Answer 3

> When each successive increase in factor inputs increases output by a greater amount than the last increase.

Question 4

Constant Returns to Scale - definition

Answer 4

> When each successive increase in factor inputs increases output by the same amount as the last increase.

Question 5

Diminishing Returns to Scale - definition

Answer 5

> When each successive increase in factor inputs increases output by a smaller amount than the last increase.

Question 6

Minimum efficient scale of production - definition

Answer 6

> MES.

>The level of output at which a firm can achieve the lowest possible average cost of production.

Question 7

When do economies and diseconomies of scale occur?

Answer 7

> Long-run only.

Question 8

Causes of economies of scale - mnemonic

Answer 8

Really
Fun
Mums
Try
Making
Pies

Question 9

Causes of economies of scale - list

Answer 9

1. Risk bearing
2. Financial
3. Managerial
4. Technical
5. Marketing
6. Purchasing

Question 10

Causes of economies of scale - risk bearing

Answer 10

> Spread risk over larger output range.

Question 11

Causes of economies of scale - financial

Answer 11

> Negotiate lower interest rates on loans as less of a risk for banks.

Question 12

Causes of economies of scale - managerial

Answer 12

> Can employ people to specialise in an area, which can boost productivity.
Specialist skills.

Question 13

Causes of economies of scale - technical

Answer 13

> Bring in specialist machinery, which boosts productivity.
Factory more efficient.
Or employ more workers = increases productivity.

Question 14

Causes of economies of scale - marketing

Answer 14

> Costs are spread over a greater quantity.

>Discounts through bulk-buying.

Question 15

Causes of economies of scale - purchasing

Answer 15

> Bulk buying, which gets unit discounts.

>Costs spread over a greater quantity, i.e. deliveries.

Question 16

Key point for economies of scale

Answer 16

> It’s all about AC = increase in TC/ an even greater increase in quantity.

Question 17

Causes of diseconomies of scale - mnemonic

Answer 17

> 3 C’s and an M.

Question 18

Causes of diseconomies of scale - list

Answer 18

1. Control
2. Communication
3. Coordination
4. Motivation

Question 19

Causes of diseconomies of scale - control

Answer 19

> As gets larger, it’s harder to control the workforce.

>If workers know they are under less scrutiny they will slack off more = lower productivity.

Question 20

Causes of diseconomies of scale - coordination

Answer 20

> Coordinating different parts of the business gets harder as you get larger.
Productivity suffers.

Question 21

Causes of diseconomies of scale - communication

Answer 21

> Harder to spread messages through the company.
Increases time and effort.
Wastes time affecting productivity.

Question 22

Causes of diseconomies of scale - motivation

Answer 22

> Each extra worker is going to feel less and less valued as there’s so many workers.
Feel like you can be replaced.
Fall in productivity.
Rise in absenteeism.

Question 23

Key point for causes of diseconomies of scale

Answer 23

> It’s all about rising average costs caused by total costs increasing a greater rate than the increase in quantity supplied.

Question 24

External vs Internal Economies of Scale

Answer 24

> External economies of scale involve changes outside a firm whereas internal economies of scale involve only changes within a firm.

Question 25

External Economies of Scale - examples

Answer 25

1. Better transport infrastructure
2. Component suppliers move closer
3. R&D firms move closer.
4. Local colleges may offer qualifications reducing training costs.

Question 26

External economies of scale key point

Answer 26

> It’s all about lower average costs due to a fall in total costs despite producing same quantity.

Question 27

Q. Assess whether the increasing market share of Amazon will be beneficial to consumers. (25 marks).

Answer 27

1. Intro. Outline argument. Definitions.
2. Economies of scale. Diagram showing outward shift of MC and highlighting growth in consumer surplus.
3. Limitations to EoS. Diseconomies of scale. Affect on consumer.
4. Conc 1. Depends upon whether more fixed or variable costs, competition between Amazon’s suppliers. Assumes lower costs = lower price for consumers. Could reinvest.
5. Market domination, ‘price maker’ - may not reduce prices. Maximise profits. Don’t operate at the point of AE or PE so deadweight loss occurs. Diagram highlighting DWL and potential welfare gain if Amazon chooses to profit maximise.
6. Dynamic efficiency. MC shifts right reducing DWL as operates closer to the point of AE. Increase in their Intellectual Property Rights = benefits consumers as increases quality and innovation of products.
7. If became monopoly means smaller firms forced to shut as aren’t benefitting from EoS - consumers forced to pay higher prices and face less variety of products.
8. Main conc.