Economies of scale are the cost advantages that a business can achieve by expanding the scale of production. That is, when long-run average costs (LRAC) fall.
Overhead costs (fixed) are spread over more units produced.
Overhead costs (fixed costs) are spread more when more units are produced.
These lower costs are an improvement in productive efficiency and can benefit consumers in the form of lower prices.
Units produced
Total cost
Average cost
(Total cost / units produced)
10
20
50
100
500
ECONOMIES OF SCALE
Internal economies of scale = are the cost saving advantages that result from a firm expanding their scale of operations.
External economies of scale = are the advantages that accrue to a firm because of the growth of the industry in which the firm is operating, are not the result of the firm changing its own scale of operations.
Complete the table by outlining the advantages to the business when economies of scale are achieved.
Internal economies of scale (p.68)
External economies of scale (p.70)
DISECONOMIES OF SCALE
Internal diseconomies of scale = are the cost disadvantages (the increase in marginal cost per unit) faced by a firm as a result of the firm expanding its scale of operations beyond a certain point (technical optimum). The firm’s output level is above the technical optimum.
External diseconomies of scale = are the disadvantages faced by a firm because of the growth of the industry in which the firm is operating, are not the result of a firm changing its own scale of operations.
Complete the table below, outlining the issues that can occur when a firm expands beyond its technical optimum level of output.
Internal diseconomies of scale (p.69)
External diseconomies of scale (p.71)
Law of Diminishing Returns = occurs when a firm experiences a decline in additional output as it increases a factor of production (such as labour) while holding the amount of other factors of production constant.
ACTIVITIES:
1. Complete Question 1(a-d) and 2(a-e) in your Workbook (p.52-54).
2. Read and summarise ‘5.6 Investment, technological change and ethical decision making’ (p.71-75) in your books.
3. Complete Multiple Choice questions 1-15 in your Workbook (p.48-51).
Answers to Chapter 5 Workbook questions will be placed in Google Drive on Thursday afternoon. Please check your answers!
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