1. Economies and diseconomies of scale
3.14 Operational Strategies: location
Economies and diseconomies of scale

2. Candidates should be able to:
Syllabus
Candidates should be able to:
Define types of economies of scale and diseconomies of scale
Analyse the minimum efficient scale
Distinguish between internal and external economies of scale

3. Economies of scale and long run average cost
In the long run, all factors of production are _________
What will happen to costs?
Initially long run costs _____ as output increases due to _____________ of scale e.g. a firm increases its output from 10 million units to 40 million units and TC increases from £10m to £20m; what has happened to ATC?
Eventually firms become too large and their average costs start to rise: ___________________ of scale

4. Constant returns to scale and long run average cost
It may be that long run average costs do not switch instantly from becoming cheaper to becoming more expensive:
Initially long run costs fall as output increases due to ______________ of scale
At some point long run average costs (LRAC) become constant
Eventually firms become too large and their average costs start to rise: _______________ of scale

5. Short run cost schedules – diminishing returns
TFC is a horizontal straight line showing that TFC is ___________ whatever the output. TC and TVC are parallel because the vertical distance between them is ________
The law of ____________ returns assumes that firms operate in the ________ run when at least one factor of production is _________
The inflections in the TC and TVC are caused by the change from increasing returns to diminishing returns. Do not confuse DIMINSHING RETURNS (_______ run) and ECONOMIES OF SCALE (___________ run)!!!

6. The long run and return to scale
The law of diminishing returns assumes that firms operate in the short run.
In the long run, a firm can ______ all their factor inputs
If a % increase in inputs leads to:
a larger % increase in output, this is known as increasing returns to scale
the same % increase in output, this is called _____________ returns to scale
a lower % increase in output, this is called ________________ returns to scale

7. Economies of scale and LRAC - explanation of diagram
The LRAC curve is U shaped because LRAC:
At first _________ due to economies of scale
Then they are __________
Finally they ________ due to diseconomies of scale
constant, fall, rise

8. The optimum level of production
Productive efficiency occurs when production takes place at the ____________ cost.
If the LRAC curve is U shaped, then productive efficiency occurs at the __________ of the curve when costs are constant (______________ returns to scale)
Where is the optimal level of production?

9. The optimum level of production
MES
The output level at which lowest cost production starts is the minimum efficient scale (MES) of production (the point _____)
If a firm is producing to the left of the MES, then LRAC will be ______________
If a firm is producing to the right of the MES then LRAC will either be the _______ (if there are constant returns) or _____________ (if there are diseconomies of scale)

10. Four types of internal economies of scale
Technical economies
Specialisation or managerial economies
Purchasing and marketing economies
Financial economies

11. Internal economies of scale - diseconomies
What are diseconomies of scale?
How might firms try to overcome this?

12. External economies of scale
External economies of scale occur when there is an increase in the __________ in which the firm operates
Why might this lead to lower training costs?
Which might transport improve?
What will happen to the LRAC curve?

13. Movements along the LRAC curve versus a shift
What causes a movement along the LRAC curve?
What might shift the LRAC curve downwards?
What might shift the LRAC up?

14. External economies of scale
External economies of scale occur when there is ______ in the size of the industry in which a business operates. For example:
Growth of an industry which may lead to a new local ________ network which reduces costs for local firms
Lower training costs because other firms in the area are training workers who it can ___________
The local authority may offer _______ training facilities
The _______________ may help with export contracts
New technology in the industry will _____________ average costs .

15. External economies, diseconomies of scale and the LRAC curve
External economies of scale will shift the LRAC curve of an individual firm ______________
At any given output, average costs will be lower because the industry as a whole has grown.
External diseconomies of scale will shift the LRAC curve __________________
This may arise if the industry grows quickly. When this happens, individual firms are then forced to compete with each other.
Wages and raw materials will then ___________

16. Recap of short run average cost curve and LRAC curve
In the short run at least one factor is ___________
SRAC fall at first and then begin to rise because of ______________________________________
In the long run all costs are __________________
LRAC change because of ___________________
________________________________________
In the long run, a company will choose a scale of production that will maximise its ______________

17. Definitions
_________________________________: a fall in the long run average costs of production as output rises
_________________________________: a rise in the long run average costs of production as output rises
_______________________________: falling average costs of production, shown by a downward shift in the average cost curve, which result from a growth in the size of the industry within which a firm operates
________________________________: economies of scale which arise because of the growth in the scale of production within a firm

18. Definitions continued
______________________________: the lowest level of output at which long run average cost is minimised
___________________________________: the range of output over which long run average cost is lowest