economies and diseconomies of scale

• What does the long-run average cost curve look like when there are increasing returns to scale?

  It is falling
• Economies of scale refer to a reduction in long-run average cost as output increases
• What are the two types of economies of scale?

  Internal and external
• Internal economies of scale occur within a business and are within its control
• Managerial economies of scale involve employing specialist managers to boost productivity.
• How does the use of specialized machinery contribute to technical economies of scale?

  Increases productivity
• Purchasing economies of scale allow firms to negotiate discounts when buying raw materials in bulk
• Why do firms receive better advertising rates under marketing economies of scale?

  Bulk purchases
• Financial economies of scale allow firms to borrow at lower interest rates due to reduced risk.
• Risk-bearing economies of scale occur because firms can spread their risk over a larger range of output
• What are external economies of scale?

  Benefits from industry growth
• Better transport infrastructure reduces costs for firms as part of external economies of scale.
• Research and development firms moving closer to a business is an example of an external economy of scale
• What are diseconomies of scale?

  Increased average costs
• Diseconomies of scale occur when total costs rise faster than output, increasing average costs.
• Poor control in a large business leads to decreased productivity
• How does ineffective communication affect productivity in a large firm?

  Delays and errors
• Match the diseconomy of scale with its effect:

  Control ↔️ Reduced workforce oversight

  Communication ↔️ Delayed or unclear messages

  Coordination ↔️ Conflicting business processes

  Motivation ↔️ Loss of worker value
• Lack of motivation in workers can lead to decreased productivity
• Coordination becomes more difficult as a business grows, leading to diseconomies of scale.