Chapter 5 - cost behaviour

Question 1

limits in the short term

Answer 1

constrained by scale of operation = inefficiencies when volume is increased

eg higher wages with more factory workers

Question 2

long term abilities

Answer 2

in long run firm can adjust permanently to higher output levels by investment in new resources for greater efficiency

= lower ac

Question 3

benefit of economies of scale

Answer 3

acts as a barrier to entry for new firms

Question 4

internal vs external economies of scale

Answer 4

INTERNAL = within a firm
EXTERNAL = growth in industry

Question 5

types of internal economies of scale

Answer 5

trading
financial
managerial
technical

Question 6

what is a trading economy of scale

Answer 6

1. buying economies = reduces cost of material purchases through bulk buy
2. bulk selling = savings in ad/distribution costs
3. economies of scope = cost savings through wider range of products without extra costs

Question 7

what is financial economy of scale

Answer 7

may be cheaper or easier for large firms to raise finance

investors accept lower returns for lower risk

larger firms are less risky because they have:
- valuable assets to pledge as security
- high levels of market power
- less reliance on a single market/product

Question 8

what is technical economy of scale

Answer 8

arise in production process
many industries have a high proportion of fixed costs so have a cost advantage as this can be spread over more units

may be possible for smaller company to invest in lower amount of fixed costs but sometimes not possible as investment can’t be subdivided so such assets are indivisible eg robotic machinery in car production

Question 9

what is division of labour

Answer 9

as a firm increases in size it can break down jobs into tasks assigned to separate individuals

Question 10

benefit of division of labour

Answer 10

= increased productivity by creating specialists

Question 11

how does division of labour cut costs

Answer 11

• less time to learn
• successful allocation
• learning effects enjoyed
• time isn’t wasted between tasks

Question 12

what are dimensional economies of scale

Answer 12

arise from relationship between volume of output and size of equipment

Question 13

what are managerial economies of scale

Answer 13

• centralisation of functions like admin, marketing
• more efficient use of management
• specialist staff save money

Question 14

examples of external e.o.s

Answer 14

• gov may provide educational services for new entrants in industries
• specialised support that industries develop
• government assistance granted to industries promising lots of jobs

Question 15

reasons for diseconomies of scale

Answer 15

• long chain of command
• deteriorating morale
• asymmetric info
• increased level of bureaucracy (red tape)

Question 16

minimum efficient scale

Answer 16

lowest level of output to achieve minimum average cost

Question 17

implication of mes

Answer 17

sometimes mes is so high = a natural monopoly

level of mes influences number of firms that can compete efficiently in an industry

Question 18

when does a low mes occur

Answer 18

industries with low fixed cost = low mes

Question 19

types of growth

Answer 19

organic = internal
external = acquisition or merger

Question 20

what are the types of integration

Answer 20

HORIZONTAL = same line of business, creates internal eos
VERTICAL = different stages of production, backward vertical is when firm merges with supplier. forward vertical is when firm merges with customer
CONGLOMERATE = diversification, different line of business

Question 21

what methods allow smaller firms to survive

Answer 21

• outsourcing = transferring activity inside firm to external contractor
• offshoring = costs of operation in other countries can be cheaper
• network organisations = when firm has outsourced most activities

Question 22

other strategies

Answer 22

1. shared service centre = provision of a service by one part of the firm where it has been previously found in more than one part of that firm
2. flexible staffing = eg temp staff or zero hour contracts