Essay Plans

What are the economies of scale? Who receives them? Why may a firm experience diseconomies of scale?

SYNOPSIS:

POINTS:

  1. Economies of scale occur when output increases and average costs decrease. It does NOT mean that all costs are falling simply that the average is falling. When average costs are falling the marginal cost must be below the average cost curve; when average costs are rising, the marginal cost must be above the average cost curve.

  2. The main types of economies of scale are then discussed:

    • technical
    • managerial
    • financial
    • risk-bearing

  3. The above are INTERNAL economies.

  4. EXTERNAL economies must also be discussed. Here the firm's costs are reduced as a result of activities of firm(s) or government i.e. an external economic agent. The usual example of an external economy is drainage where a farmer's neighbour's activities leading to the farmers crops giving a greater yield. Remember that increasing returns to scale refer to physical output; economies of scale always refer to costs.

  5. The direct beneficiary of an economy of scale must be the firm itself but if these costs reduction are passed on to the consumer then all will benefit.

  6. Pursuit of economies of scale may lead to social costs (see divergencies between private and social costs) also to diseconomies as the point of optimum production is over-run. Diseconomies are received purely because there are limits to economies of scale. Diseconomies may occur after a merger especially X-inefficiency. This diseconomy (rising costs) may then be passed on to the consumer. (For the above some current examples of 'unhappy mergers' are needed plus diagrams of economies of scale).
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