Economies of Scale

• What is the definition of economies of scale?

  Reduction in average production costs with increased scale
• How do costs behave in the short run?

  Costs can be both variable and fixed
• What happens to costs in the long run?

  All costs become variable
• If rent rises after a 12-month contract, how is it classified?

  It becomes a variable cost
• What distinguishes short run costs from long run costs?

  • Short run: both variable and fixed costs
  • Long run: all costs are variable
• What does the short run average cost curve (SRAC) represent?

  Average costs at a specific production level
• How does a business's long run average cost curve (LRAC) relate to short run curves?

  It is made up of multiple SRAC curves
• What happens to average costs as a business grows and shifts between SRAC curves?

  Average costs decrease with each curve shift
• What are external economies of scale?

  Advantages benefiting an entire industry
• How does a concentration of businesses affect the labor force?

  It builds a skilled workforce for the industry
• What is the benefit of supplier economies?

  Reduces buying costs through local competition
• How do educational economies benefit businesses?

  They provide a skilled labor pool through training
• What financial advantages do businesses gain from external economies?

  Access to tailored financial services and loans
• How do commercial services support growing industries?

  By offering various support services locally
• What is the role of cooperation among businesses in an industry?

  To fund research and development centers
• What are internal economies of scale?

  Cost reductions from increasing internal efficiencies
• How does marketing contribute to internal economies of scale?

  Advertising costs are spread over more units
• What is the benefit of managerial economies of scale?

  Specialist staff improve efficiency and reduce costs
• How do risk-bearing economies benefit larger producers?

  They can diversify to spread risks
• What financial advantages do larger businesses have?

  They can negotiate better loan terms
• How do technical economies of scale improve production?

  Machinery increases speed and efficiency
• What is the purchasing advantage of larger businesses?

  They receive discounts on bulk orders
• What are the differences between internal and external economies of scale?

  • Internal: Cost reductions from business efficiencies
  • External: Benefits from industry-wide factors
• What are diseconomies of scale?

  Factors causing higher costs as scale increases
• What happens to average costs when diseconomies occur?

  Average costs rise with increased output
• Why do small firms continue to survive despite larger competitors?

  • Provide personal service
  • Content with current profits
  • Flexibility in decision-making
  • Target niche markets
  • Serve local communities
  • Low setup costs
  • Customer loyalty
• What are internal diseconomies of scale?

  Cost increases as output expands in large firms
• What management problems arise from internal diseconomies of scale?

  Issues with communication, coordination, and morale
• How does communication become problematic in large organizations?

  It becomes complex and harder to manage
• What impact does employee commitment have in large organizations?

  Morale may suffer due to feeling ignored
• How does coordination become difficult in large businesses?

  Time is spent in meetings, weakening control
• What are external diseconomies of scale?

  Cost increases due to external factors affecting industries
• What is a consequence of overcrowding in industrial areas?

  Traffic congestion leading to delays
• How does increased demand for labor affect businesses?

  It makes recruitment of skilled workers harder
• What happens to resource prices as industries grow?

  Prices for land and materials may increase