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Economics 3.3.3
Economics- Edexcel 3.3.3
| Term | Definition |
|---|---|
| Long run | all factors of production are variable and the scale of production can change in the long run |
| Returns to scale | the proportionality of changes in output after the amounts of all inputs in production have been changed by the same factor |
| Increasing returns to scale | when the % change in output > % change in inputs |
| Decreasing returns to scale | when the % change in output < % change in inputs |
| Constant returns to scale | when the % change in output = % change in inputs |
| Capital-labour substitution | Replacing workers with machines in a bid to increase productivity and reduce the unit cost of production |
| Economies of scale | unit cost advantages from expanding the scale of production in the long run |
| Examples of internal economies of scale | technical economies, purchasing economies, managerial economies, financial economies, risk-bearing economies, network economies |
| Network economies | networks of suppliers / customers with a low marginal cost of adding users |
| What do risk-bearing economies arise from? | product diversification and market diversification |
| Technical economies of scale | gains in productivity/efficiency from scaling up long-run production |
| Internal economies of scale | when a company cuts costs internally, so they're unique to that particular firm |
| Container principle | dictates that every container should address a single concern and do it well. |
| Experience curves | the more experience a business has in producing a particular product, the lower its costs |
| Purchasing economies | buying raw materials in bulk and getting discounts from suppliers |
| Main benefits of economies of scale | lower LRAC, increased profits, positive impacts on share price, retained profits, larger business scale |
| Potential benefits to consumers from businesses utilising economies of scale | higher real incomes and consumer surplus, improvements in dynamic efficiency, higher real wages(employees), benefits from network externalities(better access) |
| Possible disadvantages to consumers from economies of scale | question the extent to which EoS leads to lower prices, reinforce market power, environmental consequences, price isn’t only metric to measure consumer welfare |
| External economies of scale | changes outside the business |
| Effect of external economies of scale | expansion of entire industry cause lowering unit costs |
| Examples of external economies of scale | uni research departments, transport networks lower logistics costs, relocation of suppliers to centre of production, influx of human capital |
| Diseconomies of scale | increases in the unit cost of supply in the long run due to decreasing returns to scale |
| Consequences of diseconomies of scale | rise in LRAC, expansion beyond optimum size and lost productive efficiency, reduced profits |
| Minimum efficient scale | scale of production where all the internal economies of scale have been fully exploited |
| MES | minimum efficient scale |
| MES point | lowest point on a firm’s LRAC where average cost meets marginal cost |
| MES is likely to be low or high relative to the size of market demand in a highly competitive industry? | low so there is room for many businesses to compete |
| MES is likely to be low or high relative to the size of market demand in a natural monopoly? | high so industry will be highly concentrated |
| 3 causes of an industry having a high MES | large fixed costs of setting up production (e.g. pharmaceuticals), low marginal cost of supplying to extra customers compared to fixed costs, LRAC falls in a natural monopoly so only one business can exploit EoS |
| Examples of markets with high MES | utilities, underground transport systems, social networks and search engines |
| Examples of markets with low MES | cafes, coffee shops, hotels, dry cleaners |
Created by:
jessharris
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