3.3.3

• economies of scale allow large firms to have a lower average cost than small firms
• diseconomies of scale occur in large firms where growth is so large that the average costs per unit begins to increase
• diseconomies of scale forces business costs to rise, potentially causing consumer prices to rise
• internal economies of scale - reduction in average unit costs as firm increases in size
• external economies of scale - reduction in average unit costs as industry increases in size
• increasing returns to scale - an increase in inputs leads to proportionally larger increase in output
• constant returns to scale - an increase in inputs leads to the same proportional increase in output
• decreasing returns to scale - a decrease in inputs leads to proportionally smaller increase in output
• minimum efficient scale is the lowest average cost of production in the long run
• minimum efficient scale is the lowest point on the LRAC curve
• LRAC 


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• from Q1 to Q2, the firm has reached productive efficiency
• optimum level of production is when average costs are minimum
• internal economies of scale: technical, marketing, financial, managerial, economies of scope, networking, risk bearing
• internal economies of scale: technical, marketing, financial, managerial, economies of scope, networking, risk bearing
• technical economies of scale - larger firms can afford to invest in more advanced and productive machinery/capital - lowers average costs per unit
• technical economies of scale - large firms are able to appoint specialist workers and buy specialist machines - able to do jobs more efficiently
• technical economies of scale - large firms can afford to buy as many machines as possible for each stage of production - can run each machine at an optimum level
• technical economies of scale - large firms can access productive machinery that cannot be scaled down (indivisibility)
• technical economies of scale - larger firms can invest in new technologies and research
• marketing economies of scale - large firms are able to bulk buy - raw materials are cheaper than competitors - lower average cost per unit
• marketing economies of scale - firms can afford specialist workers as they have more knowledge of them
• marketing economies of scale - marketing costs are usually fixed - cost per unit becomes insignificant as output increases
• marketing economies of scale - larger firms have better transport rates because they ship a lot of goods
• financial economies of scale - large firms are seen as more creditworthy - banks offer them loans at lower interest rate
• financial economies of scale - larger firms can raise money by issuing shares or bonds - often cheaper than bank loans (easier access to capital)
• financial economies of scale - large firms can borrow larger amounts at once - reducing transaction costs per unit borrowed
• financial economies of scale - suppliers may offer longer payment periods or discounts to large, financially stable firms - reduces costs per unit
• managerial economies of scale - firms can employ specialist managers who are more efficient at different tasks
• managerial economies of scale - specialist managers can be split into different departments to spread workload
• economies of scope - large firms can use their specialised labour, equipment and ideas used in one activity to be used to support another activity
• networking economies of scale - is achieved through the use of a common language or currency. The marginal cost of increasing economies of scale is virtually 0
• risk bearing economies of scale - a large firm can expand their production range - this spreads risk because if one product fails, they can shift their resources into more successful products
• external economies of scale: labour and improved infrastructure
• successful firms in an area with other successful firms in the same industry - workers will move into that area if they want to work in that industry
• firms can hire workers who have been trained by other firms - more cheaper and efficient than retraining them
• improved infrastructure (new shipping port) - firms production costs decrease
• improved infrastructure means that transportation becomes faster and cheaper - delivery costs for raw materials and finished goods reduces
• utilities like electricity and water become more reliable and efficient - better production
• diseconomies of scale: workers, geography, change, price of materials and management