Costs in the long run

• What are economies of scale?

  When an increase in the scale of production results in an increase in output, with this leading to a decrease in long run average costs
• What time frame are economies of scale experienced?

  In the long run, because a change in the scale of production implies that all resources are variable
• What is the relationship between long run average costs and output in economies of scale?

  As output increases, long run average costs decrease
• What are internal economies of scale?

  When the long run average costs of production decrease as the size of the firm increases
• What are external economies of scale?

  When the long run average costs of production decrease as the size of the industry the firm is in increases
• How can technical economies be an example of an internal economy of scale?

  Firms who increase the storage of their products such as through larger warehouses can hold many more of these products
• How can marketing economies be an example of an internal economy of scale?

  As a firm increases in size, the cost of advertising is spread out over a larger number of potential customers
• How can commercial economies be an example of an internal economy of scale?

  Large firms can buy their products in bulk from their suppliers and because of this, they are likely to get better deals and can therefore get these products for cheaper
• How can managerial economies be an example of an internal economy of scale?

  Large firms can increase efficiency by employing highly skilled and more experienced managers, many of whom specialise in managing different parts of the business
• How can financial economies be an example of an internal economy of scale?

  Large firms can make deals with lenders on the stock market to borrow at a lower rate of interest, and they are more likely to get this investment as they are low risk compared to small firms
• How can risk bearing economies be an example of an internal economy of scale?

  Large firms can spread risks to the business through diversification
• What is the minimum efficient scale?

  The output at which a firm's long run average cost curve stops decreasing, or the minimum output at which internal economies of scale can be exploited
• What does the minimum efficient scale curve show?

  The average total costs per quantity of output for small, medium, and large firms, and how they can't go below the long run average cost
• What are constant returns to scale?

  When the long run average between a firm's inputs and outputs are proportional to each other
• What are diseconomies of scale?

  When an increase in the scale of production results in a decrease in output, with this leading to an increase in long run average costs
• How does X inefficiency cause diseconomies of scale?

  As a firm increases in size, administration costs might increase out of control, and a lack of competition in a large firm might mean that costs are allowed to increase
• How does poor communication cause diseconomies of scale?

  Communications between managers and workers might become harder, and as a result workers would experience delays in receiving information they require in a sufficient time
• How does demotivation cause diseconomies of scale?

  Large firms often do not value their workers to the same extent as a small firm would, and this could lead to decreased worker efficiency and thus overall productivity
• How does poor coordination cause diseconomies of scale?

  Large firms can be dificult to manage especially if they are operating in different countries, and therefore coordinating production decisions can be hard and requires more time and money to be spent
• What are external diseconomies of scale?

  When the long run average costs of production increase as the size of the industry the firm is in increases
• What are examples of external economies of scale?

  Improvements in transport which benefit all firms in a particular industry, skilled labour attraction to areas with a reputation for specialising in a particular service, and new methods of production
• What are examples of external diseconomies of scale?

  There might be higher costs such as rent if firms want to relocate to a particular location, congestion caused by the rapid growth of industries in an area would increase transport costs, and firms will face higher unit costs for resources as demand increases