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Title: Economies and Diseconomies of scale
Description: Definition of economies of scale, notes and different types of economies and diseconomies of scale that occur with firms includes notes on diagram of long run average cost curve and minimum efficient scale
Description: Definition of economies of scale, notes and different types of economies and diseconomies of scale that occur with firms includes notes on diagram of long run average cost curve and minimum efficient scale
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Economies of Scale
EOS: a reduction in long run average costs resulting from an increase in the scale of production, this
may arise from the growth of a firm/industry
Internal EOS: benefits a firm gains when it grows in size, lower unit costs
External EOS: lowers firm’s unit costs because entire industry is growing
Types of economies of scale
-
-
-
Purchasing: buying in bulk, lower unit
costs
Managerial: possible to employ
specialists to increase efficiency = ↑PE
and output e
...
Managers, accountants
Financial: banks more willing to lend to
well established firms as they know have
assets to pay back loan if the firm falls
through
Risk bearing: can produce greater range
of products as if 1 is unpopular won’t
harm loss as much as they have other
products that are still being sold, if small
firm did this they would experience major
loss
Diseconomies of scale – higher unit costs from
increasing size
-
-
-
Lack of communication: firms that have
bases and offices in different countries
find it hard to communicate because of
time zones -> becomes less efficient,
have to go through more layers of
bureaucracy
Less motivation: workers feel alienated as
feel less involved in decision making
process as so many people in the
workplace
Lack of coordination – can’t work
together smoothly
Long run average cost curve
LRAC shows minimum unit cost
curve (LAC) shows the minimum
unit cost of producing each level of
output for each scale of operation
of the firm
Each scale/size of operation has
own SRAC e
...
SAC1
Minimum efficient scale – the lowest level of output
needed to produce at lowest unit cost, internal EOS are
fully used
Title: Economies and Diseconomies of scale
Description: Definition of economies of scale, notes and different types of economies and diseconomies of scale that occur with firms includes notes on diagram of long run average cost curve and minimum efficient scale
Description: Definition of economies of scale, notes and different types of economies and diseconomies of scale that occur with firms includes notes on diagram of long run average cost curve and minimum efficient scale