Falling avg. costs of production that result from a rise in level of output
What is Internal EoS?
Fall in costs of production due to increased output of individual firm
What is External EoS?
Occurs within an industry, where all competitors benefit.
Financial Economies:
Larger firms receive lower interest rates on loans than smaller firms (banks see lower risk), leading to cheaper loans and lower average cost (AC)
Managerial Economies:
Firms employing specialist managers are more efficient, leading to lower average cost (AC)
Marketing Economies:
Large firms spread the cost of advertising over a large number of sales, resulting in lower average cost (AC)
Purchasing Economies:
Large firms buying raw materials in larger volumes receive bulk discounts, leading to lower average cost (AC)
Technical Economies:
Firms using more machinery at a higher level of capacity due to increased output - spread the cost of machinery over more units, resulting in lower average cost (AC)
Risk-bearing Economies:
Firms spread the risk of failure by increasing product differentiation, leading to less failure and lower average cost (AC)
What is Diseconomies of Scale?
Rising avg. costs with an increased level of output - experiences a decreasing returns to scale.
What is Management Diseconomies?
When managers work more in self-interest than in interest of firm - reduces efficiency and raises AC.
What is Communication Diseconomies?
When firms with multiple layers of management struggle to communicate quickly - inefficient - raises AC.
What is Geographical Diseconomies?
When firms have widespread locations - leads to logistical and communication issues - raises AC.
What is Cultural Diseconomies?
When firms expand into foreign markets - workers have different cultural productivity norms - raises AC.
What is the Minimum Efficient Scale?
Lowest possible cost per unit that a firm can achieve in LR.
What are the Sources of External EoS?
Geographical Cluster: As an industry grows, firm moves closer to manufacturers to cut costs.
Transport Links: Improves transport of logistics - efficiency.
Skilled Labour: Increase in supply of skilled labour lowers cost of it.
Favourable Legislation: Gov. supports certain industries in order to achieve wider objectives.
What are Diminishing Marginal Returns?
Increase in productivity decreases output and increases total costs.
What is Normal Profit?
Minimum level of profit necessary to keep a firm in line of its business.
What is Supernormal Profit?
Profit above and beyond the level deemed adequate to remain in a market.
What is the Shut-down rule?
If avg. costs are greater than avg. revenue in SR, firm should be incentivised to shut down in order to not suffer any more losses.