The Firm SAQ

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Questions and Answers

What is the main benefit that a firm experiences when it achieves economies of scale?

A lower cost per unit

What type of internal economy of scale allows a firm to negotiate low-interest rates with its lenders?

Financial Economies

How does specialization of labor contribute to internal economies of scale?

Workers become more efficient

What type of internal economy of scale is achieved when a firm purchases raw materials in bulk at a discounted price?

Purchasing Economies Signup and view all the answers

What is an example of an internal economy of scale that involves the use of machinery to reduce costs?

Automation/Machinery Signup and view all the answers

How does the expansion of an industry lead to lower costs for raw materials for all firms in the industry?

As the industry expands, suppliers of raw materials also expand and produce at a lower cost per unit, which benefits all firms in the industry. Signup and view all the answers

What happens to the cost of recruitment as the industry expands and more college courses become available?

The cost of recruitment decreases as more skilled labor becomes available, leading to lower recruitment costs for firms in the industry. Signup and view all the answers

How can the development of new machinery by one firm benefit other firms in the industry?

The development of new machinery can lead to a reduction in costs for all firms in the industry, as they can benefit from the innovation and adopt the new technology. Signup and view all the answers

What is an advantage of infrastructure improvement as an industry expands?

Infrastructure improvement leads to lower costs for all firms in the industry, as they can take advantage of better transportation, communication, and other facilities. Signup and view all the answers

Why do external economies of scale arise in an industry?

External economies of scale arise because the growth of an industry leads to various benefits, such as lower costs of raw materials, access to skilled labor, and improvements in infrastructure and research and development, that are available to all firms in the industry. Signup and view all the answers

What type of costs are monetary costs of production that can be accounted for, such as staff wages and cost of raw materials?

Explicit Costs Signup and view all the answers

What is the term for the non-monetary costs that are not accounted for in the same way as explicit costs, such as opportunity costs?

Implicit Costs Signup and view all the answers

What are the costs borne by the individual who engages in an activity, such as the cost of doctor appointments for a smoker?

Private Costs Signup and view all the answers

What are the total costs to society of an activity, including private costs and other external costs, such as air pollution?

Social Costs Signup and view all the answers

What is the difference between private costs and social costs?

Private costs are borne by the individual, while social costs are the total costs to society, including external costs. Signup and view all the answers

What is one way that large firms may stifle innovation and creativity?

Moral Hazard, as they may lack incentive to guard against risk when they are protected. Signup and view all the answers

How do large firms' resources to merge or takeover smaller firms affect the market?

It can lead to a decrease in competition and potentially higher prices. Signup and view all the answers

What is a potential downside of large firms' influence on political opinion?

It can lead to unfair advantages and distorted markets. Signup and view all the answers

What is a potential consequence of a lack of competition in a market dominated by large firms?

Very high prices. Signup and view all the answers

What is one benefit of large firms in terms of their employees?

Job Security. Signup and view all the answers

What is the primary reason for the emergence of internal diseconomies of scale in a firm?

Forces within the firm, such as communication difficulties, unproductive and unmotivated staff, and increased management and administration costs. Signup and view all the answers

How does the specialization of labor contribute to internal diseconomies of scale?

Specialization of labor can lead to unproductive and unmotivated staff, increasing costs per unit. Signup and view all the answers

What is an example of an internal diseconomy of scale that arises from an increase in management and administration costs?

The need to hire more managers and expand the HR department as the firm grows. Signup and view all the answers

Why do communication difficulties arise as a firm expands?

Difficulty in efficiently communicating with a large number of employees. Signup and view all the answers

What is the overall effect of internal diseconomies of scale on a firm's costs per unit?

An increase in costs per unit. Signup and view all the answers

What is an example of an external diseconomy of scale that arises from the expansion of an industry?

Raw material shortages, leading to a rise in demand and more expensive raw materials Signup and view all the answers

How does the expansion of an industry lead to recruitment difficulties?

As demand for staff increases, firms may be forced to offer higher wages Signup and view all the answers

What is an example of inadequate infrastructure leading to higher costs?

Delays, due to increased pressure on infrastructure Signup and view all the answers

Why do external diseconomies of scale arise in an industry?

Due to the forces within an industry that result in higher costs per unit as the industry expands Signup and view all the answers

What is a common consequence of external diseconomies of scale in an industry?

Higher cost per unit Signup and view all the answers

Study Notes

Internal Economies of Scale

Refers to the reduction in cost per unit that a firm experiences when its output increases.

Types of Internal Economies

Purchasing Economies: Firms can negotiate discounts for bulk buying, reducing their cost per unit.
Specialisation of Labour: As output increases, workers become more efficient, reducing the cost per unit.
Financial Economies: Firms can negotiate low-interest rates, reducing their financial costs.
Automation/Machinery: Firms can invest in machines, lowering the cost per unit and increasing efficiency.

External Economies of Scale

External economies of scale occur when the expansion of an industry leads to a decrease in the cost per unit for all firms within that industry.

Examples of External Economies of Scale

Lower cost of raw materials: As the production of chocolate increases, milk suppliers expand and produce at lower cost per unit, leading to a decrease in the cost of raw materials for all chocolate firms.
Access to skilled labour: As the industry expands, more college courses are offered, leading to lower recruitment costs for firms.
Improvement and Infrastructure: As the industry expands, there is improvement in infrastructure, which benefits all firms.
Research and Development: When one firm develops new machinery or technology, all firms in the industry can benefit from this innovation, leading to a decrease in costs per unit.

Types of Costs

Explicit Costs: Monetary costs of production that can be directly accounted for, such as staff wages, cost of raw materials, and other expenses that are explicitly paid.
Implicit Costs: Non-monetary costs that are not directly accounted for, such as opportunity costs, which represent the value of alternative choices forgone.
Private Costs: Costs borne by the individual who engages in an activity, such as the cost of doctor appointments for a smoker.
Social Costs: The total costs to society of an activity, including private costs, such as the cost of healthcare for smokers, and other external costs that affect the broader community.

Advantages of Large Firms

Large firms have the resources to invest in Research and Development (R&D), leading to increased creativity and innovation.
Economies of scale enable large firms to lower their prices, making their products or services more competitive.
Job security is often higher in large firms, providing employees with greater stability.

Disadvantages of Large Firms

Moral hazard can occur when large firms are protected, leading to a lack of incentive to guard against risk, which can result in decreased creativity.
Large firms have the resources to merge with or takeover smaller firms, potentially reducing competition.
Large firms can exert significant influence over political opinion, potentially leading to unfair advantages.
There is a chance of collusion between large firms, resulting in anti-competitive behavior.
In the absence of competition, large firms may charge very high prices, potentially harming consumers.

Internal Diseconomies of Scale

Definition: Internal diseconomies of scale refer to the forces within a firm that lead to higher costs per unit as the firm expands its output.
Causes:
- Communication Difficulties: As the firm grows, it becomes increasingly difficult to communicate efficiently with a large number of employees.
- Unproductive and Unmotivated Staff: Specialization of labor can lead to boredom and demotivation among staff, resulting in decreased productivity.
- Management/Administration Costs: As the workforce grows, more managers and a larger HR department are needed, increasing costs.

External Diseconomies of Scale

External diseconomies of scale result in higher costs per unit as an industry expands.
Inadequate infrastructure leads to increased costs, causing delays and pressure on existing infrastructure.
Raw material shortages occur due to increased demand, leading to higher prices, e.g. global cocoa shortages increase costs for chocolate producers.
Recruitment difficulties arise as firms struggle to find staff, forcing them to offer higher wages to attract workers.

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Description

Learn about internal economies of scale, including purchasing, specialization, financial, and automation economies that lead to lower cost per unit as output increases.