(OCR A2 microeconomics help) Watch

sempyternal
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"evaluate the significance of economies and diseconomies of scale to businesses and other economic agents"

my textbook doesnt seem to cover it. i have some sort of idea of what its asking but im not just gonna make my own stuff up. has anyone got any notes on what exactly to put/ links to useful resources that cover this?
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TeeEff
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(Original post by sempyternal)
"evaluate the significance of economies and diseconomies of scale to businesses and other economic agents"

my textbook doesnt seem to cover it. i have some sort of idea of what its asking but im not just gonna make my own stuff up. has anyone got any notes on what exactly to put/ links to useful resources that cover this?
I'll provide a brief overview of Economies of Scale in the typical context of firms.

Economies of Scale refer to the situation where increased production leads to lower long term average production costs. In essence, as a firm gets bigger, they become more efficient at producing goods. Why would this be significant for firms? Well, costs are one half of the firm's calculation of profit. If a firm can reduce its average cost of production, then whilst holding its prices the same, their profit margin improves.

Why do Economies of Scale arise? Well, the size of the firm allows it to exploit opportunities that wouldn't otherwise be available if it was a smaller producer. They may be able to buy more expensive but more efficient equipment. They may be offered more financing at lower rates because of less perceived risk. They may reform their production process into individual tasks (specialisation) to produce more output for the same amount of time. There are lots of other ways but you get the idea.

However, being a large firm doesn't always result in falling average costs. When you have a large workforce it becomes increasingly difficult to co-ordinate activities efficiently, leading to diseconomies of scale, or when average costs rise with increasing output. Again, these all stem from the difficulty of co-ordinating a large number of people. You may have less motivated workers because the amount of people in the firm limits opportunities for promotion. You may have a lot of managers at the firm which could reduce the effectiveness and clarity of communication etc.

Hope that helps!
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sempyternal
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(Original post by The Financier)
I'll provide a brief overview of Economies of Scale in the typical context of firms.

Economies of Scale refer to the situation where increased production leads to lower long term average production costs. In essence, as a firm gets bigger, they become more efficient at producing goods. Why would this be significant for firms? Well, costs are one half of the firm's calculation of profit. If a firm can reduce its average cost of production, then whilst holding its prices the same, their profit margin improves.

Why do Economies of Scale arise? Well, the size of the firm allows it to exploit opportunities that wouldn't otherwise be available if it was a smaller producer. They may be able to buy more expensive but more efficient equipment. They may be offered more financing at lower rates because of less perceived risk. They may reform their production process into individual tasks (specialisation) to produce more output for the same amount of time. There are lots of other ways but you get the idea.

However, being a large firm doesn't always result in falling average costs. When you have a large workforce it becomes increasingly difficult to co-ordinate activities efficiently, leading to diseconomies of scale, or when average costs rise with increasing output. Again, these all stem from the difficulty of co-ordinating a large number of people. You may have less motivated workers because the amount of people in the firm limits opportunities for promotion. You may have a lot of managers at the firm which could reduce the effectiveness and clarity of communication etc.

Hope that helps!
thank you so much man. i might start using this website more for economics help
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